Wealth Building on Negative Interest Rates (22/02/08)

It is important to learn about what negative interest rate really are. In the past two years, we have reiterated vigorously that a comeback of negative interest rates would push capital flow into the bricks and mortars, making investment in property a relatively safe bet. Today, Hong Kong has already entered into a new era of negative interest rates. According to transaction records of 50 major estates, residential prices have increased by more than 25% over the last couple of years. We have encouraged our analysts to explain negative interest rates in everyday language and avoid the use of financial jargons that would only puzzle homebuyers further. It is certainly part of our responsibility to educate the market properly and eliminate misunderstanding among the public.

The global trend of interest rates
The Hong Kong Monetary Authority pointed out that real negative interest rates are not something normal in the marketplace, and if possible, should be avoided. Today, the long-established peg system between Hong Kong and US dollars has been deeply rooted in the local community and it would be a waste of time to criticise its undesirable impact. However, we would like to note that the globalised economy is part of our life now and that it makes sense to take into account the worldwide interest rates trend rather than merely Hong Kong’s rates movements.

Take the United States as an example. In addition to raising funds through domestic debt issuances in the face of financial strain, the US government can choose to issue bonds to overseas governments such as those in Europe, Japan and Asia. The problems facing the US are getting increasingly internationalised as a result, which means however that the financial trouble is not likely to plunge into the dead end of bankruptcy. At present, the overall global economy is still experiencing a period of healthy growth while cross-border financing contributes to the sustained development of business activities. The bullish sentiment is expected to continue in 2008 so it is not advisable to be too pessimistic.

Negative mortgage rates drive capital flow
Interest rates represent a form of cost as well as a symbol of returns to investors. Provided that property prices grow at a faster pace than mortgage borrowing rates, the higher rate of returns against the cost of capital will drive home-seekers into the market. This is the working of negative interest rates to home purchase. With the general consensus now in the projection of inflationary pressure and the downtrend of interest rates, it is no surprise that bank saving rates will lag behind the increases of consumer prices – thus stimulate local consumption. The phenomenon of negative interest rates will impose some serious psychological impacts on the public, driving investment and acting as a disincentive to savings.

Property rally on a shortage of supply
We agree unreservedly to Hong Kong Monetary Authority chief executive Joseph Yam’s remarks that property prices are determined by the supply and demand situation. The market’s bull run between 1991 and 1997 was largely caused by the annual land sales limit under the colonial British rule, which had resulted in residential supply falling behind demand and thus triggered sharp property price increases. Since the market began a long-awaited recovery in 2003, developers have maintained a premium pricing strategy in property sales, restricting the number of flats on sale. New supply of flats continues to be in shortage and property prices can easily run into an explosive rise this year if local upgrading demand picks up again.