why will the property market keep on booming[1]
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8/3/2019 Why Will the Property Market Keep on Booming[1]
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Why will the Hong Kong property market keep on booming instead of declining
in the near future?
By Ng Tsun Yip (2010280476)
Direct interpretations on property market statistics may easily lead us to draw the
arbitrary conclusion that the Hong Kong property market is again on the verge of
collapse. Indeed, using the 1999 domestic housing price index as base, the index in
July, 2010 is almost 150, the number the 1997 index approached (Rating and
valuation department, 2010). This looming danger of property market bubble, along
with public resent against “the rapacious property giants”, has compelled the
government to propose its “nine proposed measures and twelve proposed
requirements” (Sing Tao Daily, 2010) to curb the seemingly runaway property market
boom. Fortunately, the local property market is currently backed by three favourable
economic factors. The three factors, which are expected to capture a huge sum of
investment funds for the local property market to maintain its vigour, are “super-low
interest rate” designated by the US Federal Reserve Bureau, the unsatisfactory
performance of local stock market and the Macro-economic Control in China. The
following essay attempts to discuss why these three factors will make the local
property market attractive to investors amongst a variety of investment alternatives
and prolong its boom at least temporarily, on the condition that these factors will not
be altered very shortly.
We will begin by analysing the simple mechanism of how property price is
governed by the investment returns from other investment alternatives. After that, we
will proceed to analyse the effects of the factors mentioned above one by one.
There exists an apparent negative relationship between the property market price
and the expected returns from other investment alternatives as investment goods are
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substitutes to each other. Firstly, demand for investment goods is tightly connected to
their expected returns. The higher the investment returns from a good, the larger
would be the demand for it, thereby pushing its price upward. Given a specific
amount of investment fund endowment, an investor chooses between different
investment options. A fall in returns from an investment good tends to boost the
demand for others because the latter are now deemed as investment substitutes as they
are now relatively more profitable, given that their anticipated returns keep constant.
In a word, rational maximising investors incline to choose relatively profitable
investment portfolios.
The local interest rate is now subject to the US “super-low interest rate”, which
depletes paybacks from major interest bearing investment goods like bank deposits
and securities. This consolidates the status of the local property market as an attractive
investment option. In Hong Kong, for the purpose of maintaining the linked rate
system, local interest rate has to be linked to the US one to prevent capital inflows
upsetting the market for Hong Kong dollar (Dodsworth and Mihaljek, 1997). At
present, however, the US Federal Reserve Board has no intension to lift the so-called
“super low” interest rate. The Americans have to keep the rate low to exhaust the
benefits from its monetary policy. Nevertheless, the situation in the US is still gloomy
despite US$300billion to simulate its economy. Unemployment rate still approaches
ten there. (Bureau of labour statistics of the United States, 2010) Uncertain US
prospect prompts the Hong Kong government to follow suit, resulting in prolonged
interest rate nadir. With interest bearing deposits being unattractive to investors, the
now booming property market will continue to flourish so long as the US still finds its
economic problems intractable.
Low interest rate aside, the stagnant performance of stock market further boosts
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investment demand for housing. Over the past 10 month the market appears to be
quite volatile, with the peak Heng Sang Index reaching about 22500 and the low
reaching approximately 19000. The difference of the two is eminent. The index on 3
October, 2010(22358.17) just catches up with that of the beginning of the year. Risk
combined with stagnant return growth in the stock market only makes the booming
property market more exceptional in performance.
Macroeconomic control in China featured by deterrent measures on China’s
property market is another indispensible factor supporting the Hong Kong property
market in the near future. Beijing is already steeping up measures to rein its property
market in. To demonstrate the central government’s determination in curbing Chinese
property market bubble, the state council has announced an increase in housing
deposit from 40% of the price of property to be purchased to 50% and a 1.1 times
increase in mortgage loan interest (Businesstimes, 2010). More capital inflows from
China to Hong Kong property market is likely the case in the near future as expected
incomes form China property market becomes uncertain.
Logically Hong Kong property market is to maintain vigour for a period of time.
Hong Kong as a small-scale economy compared to states like the US lacks monetary
autonomy. Combined with its adherence to the linked rate system, there is no doubt
that Hong Kong interest rate will remain low due to US unwillingness to lift its rates.
Stagnant Heng Sang Index growth as well as China macroeconomic control further
discourage capital from leaving the local property market. Bound by these three, we
may expect the property market to keep thriving at least in the short run if in the
nearest future the three factors remain unchanged.
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Word count: 882
References
1. Bureau of labour statistics, (2010) Employment situation summary. Retrieved from
http://www.bls.gov/news.release/empsit.nr0.htm
2. Businesstimes, (2010, April 3) The central government swears to curb the property
bubble. Retrieved from http://www.businesstimes.com.hk/a-20100416-
66916/Sub-prime-fang-dai-gao-lou-jia
3. Dodsworth, J., Mihaljek, D (1997) Hong Kong, China: growth, structural change,
and economic stability during the transition. New York, International Monetary
Fund
4. Rating and valuation department, (2010) Price indexes for Hong Kong property
market. Retrieved form http://www.rvd.gov.hk/en/doc/statistics/graph2.pdf
5. Sing Tao Daily, (2010, June 1) “Nine proposed measures and twelve proposed
requirements” enacted today. Sing Tao Daily, p.1
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First Draft
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