below is the original text before being modified for publication in the
SCMP. But I liked my original passage more, so here it is:
Bull view: quantitative squeezing
There has been a lot of talk of a housing market bubble in Hong Kong and
that interest rate rises may precipitate a price collapse soon. I argue
otherwise. Here are three reasons why.
We live in a time of high inflation and low interest rates. The world is
awash with cash thanks to the money-printing programmes of the world’s biggest
central banks (Japan, the US, the euro zone), and even some emerging %market
countries).
First, superior returns. Compared to “safe” or investment grade instruments from
deposits to government bonds, which are generating negative real returns – that
is, real yields of -2.5 to -3.5% – real property yields although also negative,
are a more palatable 0% to -1.5%. This also explains why Hongkongers have been
buying high-yield bonds and, more recently, equities. These can generate
returns above inflation. However, they have higher corporate, credit, and
supply risks, whereas property does not suffer any of these drawbacks.
Second, inflation hedging. Property is also a great hedge on inflation,
which is the big bogeyman lurking on the periphery, thanks to unprecedented and
radical use of quantitative easing by global central banks. While rental income
rises alongside inflation (as any leaseholder knows), a 10-year bond issued
today with a one per cent coupon will yield that same one per cent for the next
10 years.
Third, governments’ need to hold rates down. With global central banks in a
“race to debase”, money supply growth should continue to run high in the double
digits. If the free market were to determine interest rates, fast depreciating
currencies would lead to sky-high interest rates to compensate for the risk of
lost purchasing power. However, central banks will hold down interest rates
down near zero in order to boost growth.
So what about the prospect of rising interest rates, given Hong Kong housing
prices are highly sensitive to interest-rate rises? My conclusion is: barring
hyper-inflation, central banks will not hike rates for another 3-4 years. Excepting
a handful of oil producer countries, all governments worldwide are running on large and
structural budget deficits, with the developed countries seeing their debt burden
approaching or exceeding 100% of GDP. If the USA GDP growth is already at an anemic 2%, a two
percentage point rate hike will wipe out all growth, and put politicians out of
their jobs. Now, if you are the head of state of any of the advanced economies,
will you let interest rates go up?
Hong Kong property will fall, but only after another 20 per cent-plus rise has
kicked in over the next few years.
