Huge Deposits

From the Money and Finance Report published by Census & Statistics Department, we can see a much brighter picture.

The figures tell us that the deposits have increased by almost 80% from year 2001 to 2008 - from 3400b to 6000b.

This is why we do not see much negative effects in Hong Kong during the financial crisis.
The sound fundamentals will give a firm ground for an explosive upward movement in property markets in the coming months.

Economic Fundamentals of Hong Kong

With respect to the data on the number of people (both sexes) earning above $ 30,000, the figures for the years are listed below:
1.     Year 2001 Q2         -       339,600
2.     Year 2005 Q4         -       360,600
3.     Year 2009 Q1         -       483,600

You can see that the middle income group has been increasing and the pace is at about 30% plus from the year 2005 to 2008. Please also refer to the link to Centaline: http://www.centadata.com/cci/cci.htm

The property index in year 2001 is at about 45 and the figure for early 2009 is at about 62. The increase is at around 38% and the problem of negative equity for property owners has nearly gone except for the ones whom really bought at the peak in year 1997.

From the above figures, one can easily grasp the picture that the wealth of Hong Kong middle income group has been increasing at an extraordinary fast rate. Though the median income has not changed in last few years, in fact the number of people of over $30,000 salaries per month having buying powers has been growing. This middle income group is the real engine for retail sales and service industry, like catering.

We have been misled by media and government to think that Hong Kong is not good enough. It is true that the low income group has no improvement in salaries and working conditions. This partial fact has overshadowed the real strength of our society. As members of middle income group like you and me, we are enjoying most from low services costs with the support of excess supply of low income workers. Comparing with other places in advanced countries, we pay much less in taxes, medical fees and also, other services. As a result, our disposal incomes or percentages of saving are really high. Though there are no data available, I strongly believe we can save more per head than most other places. The only drawback for us is that we have to live in tiny apartments by US and Europe standards.

Following on the above deduction, the wealth of Hong Kong people to be allocated for investment can be huge and beyond any imagination. If the opportunity comes at the right time, we will see an explosive upward surge in stock and property markets. I guess it may come in a couple of years later. Let’s see.

From the economic performance in last few years, it is considered that Hong Kong is moving in an expansion cycle starting from 2003 when SARs was happened. The last downturn and recession lasted from 1998 and ended in 2003. Then, the recovery started right after SARs. The time span of current economic expansion will depend on many factors. Judging from Hong Kong special circumstance, the low tax and high saving rate have always promised a much longer periods of expansion than contraction.

The happening of SARs in 2003 was so severe which could only be matched by the WWII. After sufferings in SARs, the economy recovery will be much stronger than people normally expect. This is a kind of human behaviour that when people recover from serious sufferings, they usually can build up a strong will and heart to face new challenges. We can see our mainland neighbours whom have been prospering at world record rates after Cultural Revolution. Hong Kong people are no exception but they do not know themselves yet.

In fact, the trend of rise in local consumption had only just started in late 2005 and the pace of moving up was disrupted by financial crisis in last year. At the moment, most people do not know the real strength of Hong Kong and the overall accumlated wealth. It is most probably due to misleading news coverage by local media which have always over-emphasied our weakness. The other main reason is that the gap between rich and poor has been much widened. We have a large proportion of working population earning just a few thousand each month. The news about them have occupied the mind of everyone. However, people do not recognise that the percentage of persons earning more than 30,000 has been also increasing. This group of high income peope is the real engine for domestic consumption propping up the local retail and property market.

Economic Models and Market Behaviour

From the happenings in last two years, more and more economists have to accept that the assets markets are irrational in nature and people have started to abandoned the use of mathematical models to research the development of future trends. In fact, the accumlated wealth of rich people in developed countries has reached a level which is beyond anyone's imagination and governments cannot hardly control. The actions and reactions of the big institutions which manage the wealth of these rich people have been working almost independently of basic economy of our world. The events in last few months have told people that even the bankers at Wall Streets were all making decisions by following herd instincts.

Simply speaking, there is too much money moving around to chase for profits. The acts of hot money flows are directed by the big fund houses and the activities do not reflect the state of general public. Give you one example is that even there was a great jump in property and stock markets in US for the years before financial crisis, the incomes for middle class had barely moved up during this period.

We are living in a world of two compartments. One is for general public who are working hard to earn living. The other is for the well off to play around with their wealth. Understanding this background, people should not cry loud to say that the property prices have gone away from fundamental economic development. 

Analysis of Property Price Movement

First of all, I have no crystal ball to tell the future. I only use my best knowledge to guess what will happen generally. My rate of sucess is slightly better than those just using instincts and feelings to make judgements.

My statement on markets of high end and user mean that the high end generally refers to new flats and user is the second hand property. For the new flats, the prices are set by developer and many mainland investors love to buy. From the past records published by Centaline, people may easily find that the success of making profit by buying into new developments since 2004 is very discouraging. Many new flats buyers lost money or have their properties prices kept on hold when the second hand properties surge ahead. The main reason is that the developers have put a premium on the new flats which have taken off the profit margin for investment purpose.

Hence, my advice to people is to avoid the new flats, especially for those at Tseung Kwan O where the supply of new flats in near future is abundant.

From the current trend, we can easily predict that the second hand properties on Hong Kong Island and Central Kowloon, say Mei Foo will enjoy the great ride of this new wave.

For seriously assessing the validity of prices, you may consider to think about the use of rental yield which measure the rent in relation to the price. The mechanism is just like P/E ration which also tells people the state of price. This simple calculation may not guide you to make fortune as it cannot forecast the future, but the figure can tell you whether the prices are within reasonable range. The general guideline is that if the rental yield is over 3% while the saving rate is close to zero, then it gives a signal to buy. When the prices jump too much and push down the yield below 2%, then you have to take care of a possible correction. From 3% to 2%, it represents the price rise of over 30% which is handsome profit for leverage mortgage. For some people, the scale of this price rise is a real fortune.

Take care! I am optismistic about the current trend of price rise but no one can tell exactly how far it will go or how long it will happen. Patience is my last word to you.

Hong Kong a Regional Hub

The current wave of price rise in property market is different from what happened in 1997. At that time, China's economy was much smaller than now and it's influence on Hong Kong was relatively weaker than the power of West. Also, the property bubble in 1997 was covering the whole Hong Kong that even the flats in Tuen Mun could fetch $6000 per sq.ft. Now, we have two markets - high end and users.

From latest statistics of monthly income and current interest rates, the average ratio of mortgage to income is still within safe limit. With the huge increase of wealth in China cities, especially those in South China, Hong Kong being a regional hub and free port for money flow has become the destination of funds from motherland. Basically, our own wealth has also built up since SARs. All these elements are exactly the right constituents for a boom market.

When property becomes the few easily accessible assets, people with reasonable saving will start pay attention on how to join the party. Now, it is just the start of show time and we still have a long way to the end. 

It is interesting to discuss in such direction.

Comparing with RMB, Hong Kong dollar is a well recognised international currency which has high regard in the world. Now, Hong Kong is closely intergrating with South China in the region of Pearl River Delta. The combined strength of this region is huge which may be comparable to the economic size of California though there are no figures yet to support my statement.

Hong Kong dollar is being used in mainland daily money trading and its influence to China is beyond our imagination. Of course, the highest priority of China is to get RMB be internationalised. But, it will have great risk to China finance infrastructures which have not been tested by recent financial crisis. Say, is the State Department be ready to take on challenge of attack by Hedge Funds, like what happened in Hong Kong in 1998, or the other case that Sterling was attacked by Soros in early 1990s?

Personally, I do think that State Department has great reservation to take on the challege directly as they do not have experience before. Simply, they are not sure what the risk is. The collapse of RMB in front of the West is an unacceptable and intolerable humilitation to our senior leaders who were born and educated in a entirely different place than us. They are not used to lose face of this scale. From these considerations, there are already rumours that State Department may make use of Hong Kong dollar as a shelter for RMB or it acts as a first defence line of RMB for the process of internationaliztion. The details of this mechanism is yet to be disclosed.

Bubble and Human Life

The bubbles inflated in every cycle of economy have always caused damages at the time of bursts. More and more economists have to accept that the markets are not rational in nature and principle. It is because people are invovled in every market and they make decisions in every second in trying to earn the best advantages. Most people claim that they have applied rational thinkings and every kind of advanced models to make judgements in all sorts of investment. However, it turns out that all these decisions are at large part come from their basic instincts or feelings which are irrational and not predictable. This kind of behaviour is fully reflected in the crisis.

When millions of people act together in one society, the outcome is highly unpredictable. At most of the time, they have herd instinct to follow the so-called successful leaders. Of course, at the start, they will try to find out who is most successful and spend time to observe. Then, when a large group seems to be more successful than the others, the remaining mass will exercise the instinct to follow suit. Their decisions will then be decided by the basic human nature rather than reasonable calculations. This is the stage when the bubble is inflating and its appearance is most beautiful. At such time, people have the thought that everything is so perfect that world is having no problem and there are endless happy days forever. From old thinking, this is the time when the party is to end.

From the above observation, people can see that no matter how the bubble is damaging, it cannot be avoided because the bubble is part of human nature. It is what we want to be exciting and wonderful in our life.

To be fair, without bubbles, life is very boring to most people whom would prefer to die young.

To get rid of the bubble is meaningless at all.

Relationship of Demand and Supply

People have been talking about the limited supply of new flat units affecting the market prices. This statement should require careful examination.

Firstly, we need to look into what the meanings of supply and demand are.

Supply of properties is in the hands of property developers, government and property owners. The number of these people is small in comparing with the general public but the wealth of society is almost under their control. Their behaviour can be easily predictable as their aims are well known.

On the demand side, it is generally referred to public behaviour which is always changing to cope with latest economic development. Say, for living spaces, people could accept to live in very crowded shared flats in early 60s when Hong Kong was still in primitive development state. Public could hardly afford to pay for large apartments. At that time, one 200 sq.ft of public flat could accomodate up to 7 persons. The demand for new private units was scarce.

After the economic boom since 70s, more Hong Kong people were well off and they had strong desire to live in larger units which then drove up the demand for new flats. To match with such requirements, the boom of property markets had then started and the trend is still going on till now. Simply speaking, the demand is moving with economic development. Whenever there is a downturn, the demand for new flats will drop as people cannot afford expensive large units.

In a recession, no matter how you limit the supply, the demand drops faster than developers can predict. Same happens in a upward market but in a reverse direction, people have desire to upgrade the living standard and like to regard properties as assets which can earn money. Under such conditions, even with hugh supply, the demand will at most time outstrip the new flats as offered in the market.

This relationship of demand and supply had been fully reflected in our last downturn from 1998 to 2003. During this period, government and major property developers had been trying to limit supply but not be able to resist the declining trend of prices.

For investment in property market, we should place more attention on demand rather than supply. It is due to sole reason that demand as moving with economy is highly unpredictable which is major factor affecting the prices.

Likely Trend of US Dollar

The points are well established that there is really a risk of inflation due to the policy of quantitive easing by all western countries.

However, the scenario of inflation is based on the assumption the world is starting to recover and the excess liquidity in market will drive up the assets prices. This has not happened yet and may or may not happen in the near future. From recent data, the borrowings of private sector in Europe and US have not yet picked up to a comfortable level. There was recentlly published figures indicating that the inflation rate of Europe was almost dipping below zero.

In fact, the Fed and ECU have admitted that the present economic situation has not returned to healthy condition. The risk of downside is still in exist.

Against this backdrop, we should not be worry much about inflation which may be running at very low rate in the years ahead following what Japan had been doing in 1990s.

The quantitive easing of money supply will give rise to fearsome inflation is well recognised and supported by a large group of traders and economists.

However, there is another school of thought that the world is now having excess capacity in respect of production and labours. As a result, the unemployment rate will not go down for a few yeasrs until excess capacity is gone and corporations start to expand staff for increasing production. With the house bubbles bursts happened in US, UK and parts of Europe, the individual households will need to repay the debts of mortgage contracts in the years ahead. 

Against this backdrop, the private consumption will be continuously constrained at low level while the consumers are repaying the debts. The wages will not have momentum to go up as the labour markets are still having abundant supply. The combined effect is to restrain the inflation. The other factors affecting inflation are currencies values and commodities prices.

For US dollar, people have been saying that it should be declined to reflect the strength of US economy. However, UK and Europe are suffering the same problem. All these major currencies - dollar, sterling and euro are facing the same downside risks. If they are at the same situation, then there is no way that trade ranges among these currencies will be widened. Simply speaking, it is very likely that the values of these currencies will be stable for quite a while.

Economy of Hong Kong

From the economic performance in last few years, it is considered that Hong Kong is moving in an expansion cycle starting from 2003 when SARs was happened. The last downturn and recession lasted from 1998 and ended in 2003. Then, the recovery started right after SARs. The time span of current economic expansion will depend on many factors. Judging from Hong Kong special circumstance, the low tax and high saving rate have always promised a much longer periods of expansion than contraction.

The happening of SARs in 2003 was so severe which could only be matched by the WWII. After sufferings in SARs, the economy recovery will be much stronger than people normally expect. This is a kind of human behaviour that when people recover from serious sufferings, they usually can build up a strong will and heart to face new challenges. We can see our mainland neighbours whom have been prospering at world record rates after Cultural Revolution. Hong Kong people are no exception but they do not know themselves yet.

In fact, the trend of rise in local consumption had only just started in late 2005 and the pace of moving up was disrupted by financial crisis in last year. At the moment, most people do not know the real strength of Hong Kong and the overall accumlated wealth. It is most probably due to misleading news coverage by local media which have always over-emphasied our weakness. The other main reason is that the gap between rich and poor has been much widened. We have a large proportion of working population earning just a few thousand each month. The news about them have occupied the mind of everyone. However, people do not recognise that the percentage of persons earning more than 30,000 has been also increasing. This group of high income peope is the real engine for domestic consumption propping up the local retail and property market.