Easy money boost
What goes down will come up though, and later, U.S. Fed Chairman Ben Bernanke's free and easy money policy was a booster injection for property. Mortgage rates hit lows well below 1 percent during the quantitative easing (QE) process, and even now are only at around 2.5 percent. Many blamed an influx of Chinese money for pumping up prices, but Chinese buyers have never accounted for more than around a tenth of total sales. Furthermore, they focused on the extreme luxury segment of the market.
The government, sensing creeping public outrage, resorted to draconian measures a couple years ago, including doubling the stamp duty (property transaction tax) on many buyers, mainly non-Permanent residents, in order to cool the market, and raised the down payment requirements, in some cases to 60 percent of the sales price. Transaction volumes fell by two-thirds. But prices have only eased about 5 percent.
Activity in recent months has picked up again, as developers learned that by discounting prices in order to compensate for higher down payments and stamp duties, there was plenty of pent-up demand. You now regularly see surveys and studies showing the property market frothier than it ever was even in the go-go days of the late 90's.
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There are many unknowns: when will the Fed actually begin raising rates again after shutting QE, and how will an expected slowdown in the Chinese economy impact HK?
There's also one overhang that cannot be overlooked that dates from the Shek Kip Mei fire of 1953 which destroyed massive shantytowns of mostly Chinese immigrants. The British governor at the time decided to embark on a massive construction program to rehouse those left homeless and marked the beginning of Hong Kong's public housing experiment. Since that time, government-provided rental and subsidized purchase property has come to comprise nearly 50 percent of total housing stock, meaning the government is landlord to half of Hong Kong, leaving the other half to fight it out in the private market. Simple economics tells you that a synthetically shrunken supply will only lead to higher prices.