VZCZCXRO3166
RR RUEHCN RUEHGH RUEHVC
DE RUEHHK #1247/01 1890928
ZNR UUUUU ZZH
R 080928Z JUL 09
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 8030
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 001247 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EAP/CM AND EEB/IFD, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV HK
SUBJECT: BLOWING A PROPERTY BUBBLE IN HONG KONG 
 
REF: HONG KONG 191 
 
¶1.  (U) Summary: After dipping to levels not seen since the 
1980s, Hong Kong's property market has rebounded surprisingly 
strongly over the past three months.  Transaction volumes 
have returned to pre-financial crisis levels and residential 
property prices, while still down from their 2008 peak, have 
increased 25 percent from recent lows.  New mortgage interest 
rates have fallen to below 2.5 percent (less than half the 5 
percent "prime rate" for commercial lending).  Speculators 
are starting to show more interest, but the large majority of 
buyers appear to be local residents trading up as properties 
become more affordable.  Commercial rents continue to drop, 
but sale prices for prime commercial real estate are 
increasing, suggesting that property managers are optimistic 
about Hong Kong's longer-term prospects.  Property analysts 
are puzzled by the good news, coming at a time when Hong Kong 
economic fundamentals are still weak, and are predicting 
another slide in prices and transaction volumes later this 
year.  End summary. 
 
¶2.  (SBU) Comment: Property analysts have touted property 
development company stocks, property transactions and prices 
as leading indicators for Hong Kong,s economic performance. 
We've seen a significant increase in these figures since 
March, but without signs of corresponding improvements in 
Hong Kong,s real economy.  This suggests the run up in the 
stock and property markets in Hong Kong is an asset bubble 
fueled by the rapidly expanding money supply.  The Hong Kong 
Monetary Authority (HKMA) has injected billions of dollars 
into the banking system since September 2008 to grease the 
frozen interbank market.  That monetary expansion has been 
compounded by roughly US$27 billion in foreign currency 
inflows over the past several months effectively doubling 
Hong Kong's Monetary Base.  Local asset prices are likely to 
remain high until a reversal of that process forces Hong Kong 
stock and property markets down.  End Comment. 
 
================================ 
Hong Kong Property Bouncing Back 
================================ 
 
¶3.  (U) Property transactions in Hong Kong have surged since 
March 2009, returning to pre-financial crisis levels far more 
quickly than most local analysts expected.  Concerns about 
the state of the U.S. banking system in mid-2008 began to hit 
Hong Kong property transactions in August and by November, 
the local market was almost stagnant, with transactions 
falling to levels not seen since the 1980s (reftel).  After 
several months of moribund volumes and falling prices, Hong 
Kong buyers began testing the market again in March 2009. 
Transactions increased steadily from February to May, with 
sales up 160 percent over those three months.  May 2009 
transactions were up 28 percent from same period in 2008. 
 
¶4.  (U) After falling by as much as 40 percent between 
February and December 2008, property prices have also begun 
to increase again, according to Centaline Property Agency 
statistics.  The price recovery extends to all of Hong Kong's 
major regions, with property values increasing by an average 
of approximately 15 percent from their December 2008 low. 
Prices for luxury properties on Hong Kong Island fell 
furthest, but have also recovered fastest, with units now 
priced at December 2007 levels.  Centaline Vice Chairman 
Sherman Lai said that many of the luxury property buyers are 
investors, not speculators.  The return on luxury rentals in 
Hong Kong is less than 3 percent, he said, but with banks 
paying just 0.01 percent on deposits that is much better than 
most other non-equity investments at the moment.  Many of 
these investors are simply looking for a small return along 
with a safe place to keep their cash. 
 
=========================================== 
Locals, Not Speculators, Driving the Market 
=========================================== 
 
¶5.  (U) Professional Properties and Services (PPS) Chairman 
Nicholas Brooke agreed that speculators are not driving the 
recent price and transaction increases.  Market-wide, he 
estimated that only 20 percent of buyers are investors, and 
noted that 80 percent of transactions since March 2009 have 
been "mass market" properties, i.e., those smaller than 1500 
square feet.  Many recent buyers are Hong Kong residents, 
attracted by relatively low prices and falling mortgage 
rates, seeking to "move up" the housing ladder.  These buyers 
were shut out of the housing market last year when prices 
soared, but continue to believe in Hong Kong's long-term 
economic prospects.  Real estate is still an attractive and 
 
HONG KONG 00001247  002 OF 002 
 
 
tangible asset and some undoubtedly see the current dip as 
their opportunity to buy low before they are priced out of 
the market once again, said Brooke.  Falling mortgage 
interest rates are clearly enticing some buyers.  Mortgage 
applications have surged since March, with new approvals 
growing by 30 percent each month through May.  In February, 
the majority of mortgages carried interest rates over 3 
percent.  By May, a sizeable majority of new mortgages 
offered adjustable interest rates below 2.5 percent. 
 
¶6. (U) Commercial property transactions and prices lag 
residential sales, but are also increasing after falling 
fifty percent from last year, said Lim Advisors Director 
Peter Churchouse.  Prices for premium office space in the 
Central business district have returned to July 2008 levels, 
though still well below peak prices.  This despite increasing 
office vacancies and falling rents.   Investors continue to 
see strong long-term prospects for commercial property in 
established areas, he said, and will continue to buy despite 
short-term losses.  Brooke predicted that residential rents, 
particularly in the luxury sector, would also continue to 
fall as the school year ends and expatriates who have been 
laid off or had their compensation reduced depart Hong Kong. 
 
¶7.  (U) Hong Kong property development company shares are 
benefiting from Hong Kong's property rebound.  Since the 
beginning of March 2009, Cheung Kong Holdings share price has 
increased 66 percent, Sun Hung Kai Properties is up 79 
percent, Henderson Land shares are up 88 percent, Hang Lung 
Properties shares have risen 91 percent and New World 
Development shares are now up 132 percent.  Property and 
financial services shares have driven the Hong Kong Stock 
Exchange benchmark Hang Seng Index up 64 percent since March. 
 
================================= 
Loose Money Fueling Property Boom 
================================= 
 
¶8. (SBU) Our interlocutors agreed that property development 
company shares, property prices and transaction volumes have 
been valuable indicators of Hong Kong economic prospects in 
the past, but were puzzled by the recent flurry of activity 
in spite of a steady stream of bad economic news.  Hong 
Kong's GDP in the first quarter of 2009 fell by 7.8 percent 
(year on year real terms).  Consumption fell 5.5 percent and 
investment was down 12.6 percent over the same period. 
Exports and imports dropped over 15 percent in Q1 and 
continued at that level through April.  Unemployment is now 
5.3 percent, low by some standards but a level not seen since 
in Hong Kong for several years and almost double the rate 
just a year ago.  Lai argued that the increasing activity in 
the property market reflects a reallocation of assets as Hong 
Kong investors start looking for higher, but still relatively 
safe, returns.  Brooke and Churchouse agreed that the 
positive market performance was driven by factors other than 
Hong Kong's economic fundamentals and predicted that the poor 
economic climate will soon force prices and transactions down 
again. 
 
¶9.  (SBU) The property market and the Hang Seng Index (up 64 
percent since March 9) have risen in tandem, perhaps 
providing a clue to the cause of their rapid ascent.  Since 
September 2008, the HKMA has more than doubled the Monetary 
Base from US$42.2 billion to US$91 billion.  The Monetary 
Base is comprised of Certificates of Indebtedness, notes and 
coins in circulation, the Aggregate Balance of the Banking 
System (the sum of bank clearing and reserve accounts), and 
outstanding Exchange Fund bills.  In response to extremely 
tight interbank liquidity in September 2008, the HKMA in 
October began issuing additional Exchange Fund paper to help 
banks manage their liquidity needs.  Over the past nine 
months, the stock of outstanding Exchange Fund paper has 
increased from US$19 billion to US$37.7 billion.  The 
Aggregate Balance increased from just US$606 million to 
US$28.1 billion as foreign currency inflows have flooded Hong 
Kong, drawn by Hong Kong's easy convertibility and the HKMA's 
100 percent bank deposit guarantee.  With so much money in 
circulation, inflated asset prices are a predictable 
response. 
DONOVAN