A New Property Chapter on Negative Interest Rates (25/01/08)

Global stock markets took a severe hit in the last few days as investors got into a panic to dump shares. The Federal Reserve came to the rescue and made a sudden interest rate cut by three quarters of a percentage point prior to the start of Wall Street trading on Tuesday. The surprising move triggered a strong rebound of more than 2,000 points for Hang Seng Index. With the mounting pressure on the US government to come up with stimulus packages to avoid a hard landing, there is no way out but to cut interest rates further to help the economy.

Property is safe haven against instability
Unlike the financial turmoil in the 1990s, the ongoing crisis stems from problems with the US, the economic dragonhead in the world. The US property bubble burst has significantly more far-reaching impact than the repercussions of the previous financial storms in Mexico, Latin America, Asia and the former Soviet Union – because the greenback has already become the major currency in the reserves of central banks around the globe. US dollar denominated assets and investment tools have spread to virtually every corner of the markets worldwide. The complexity of relevant derivative investments presents the biggest uncertainty to the market, especially when these investment tools have evolved into a state of confusion with inadequate regulation. The depth and width of the subprime mortgage crisis is a typical example of such inadequacy.

New Engines: China, India and the Middle East
The current crisis has dealt a severe blow to stock markets worldwide. Yet it comes as a timely reminder, forcing the US to face up to the reality sooner than later that investors around the world could no longer park their money blindly with US dollar assets given the profound risk uncertainty and the greenback’s declining value. With a slowing US economy, China, India and the Middle East countries with rich petroleum resources shall emerge as the world’s key growth engines. China is poised to capitalise on the hosting of Beijing Olympic Games to drive its economy to counter the world’s recession and to maintain a high GDP growth to wade through the tough environment. Like what a saying “the easterly blows when the westerly wanes” suggests, China is entering into a new era of development today. With this backdrop, the bull market in Hong Kong is set to continue.

End-user demand on supply shortage and improved affordability
Pessimists have raised worries of a bubble burst with the local property market despite the presence of negative interest rates and other favourable factors. However, I would like to emphasise that the Hong Kong market has strong and sound fundamentals. There are three major supporting factors:

1. Hong Kong is a high savings society. The total personal savings with local banks are estimated at HK$6,000 billion.
2. The indebtedness of local families is low. The mortgage-to-income ratio has declined steadily to about 30%.
3. Land Registry records showed a low volume of confirmor-related transactions in 2007, indicating that just 1.6% of home purchases involved short-term speculators during the year.

An economic cycle has to go through a number of financial crises, big and small. During a market slump, average investors are often polarised into two major categories – the extreme pessimists prefer to hold cash on hand and on the defensive; the ultra-aggressive ones on the opposite camp are prepared to fight back hard to regain their lost ground. Hong Kong’s property market is characterised by a supply shortage, strong demand from end-users, low level of indebtedness and high savings rate. Buying into Hong Kong property assets appears to be a good bet.