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Monday, November 19, 2018, 10:22
Unwise to unpeg HK dollar to greenback now
By Oriol Caudevilla
Monday, November 19, 2018, 10:22 By Oriol Caudevilla

Hong Kong has serious issues regarding property prices: They have never been higher, which makes it very difficult for the average citizen to eventually be able to afford a decent apartment to live in and raise a family.

Why are property prices so high? In my opinion, it is a combination of many factors, which makes overcoming Hong Kong’s property issues a difficult challenge. In this sense, proposals like Carrie Lam Cheng Yuet-ngor’s Lantau Tomorrow Vision should be applauded, since it is a bold plan and bold plans are needed to address Hong Kong’s housing shortage.

However, in this article I will focus on whether an undervalued Hong Kong dollar is one of the causes of spiraling property prices.

Is the Hong Kong dollar undervalued? I think it is. According to The Economist’s Big Mac Index (an informal index to measure the purchasing power parity between two currencies), in 2017 a Big Mac cost US$4.95 in the United States, against an equivalent of US$2.48 in Hong Kong, which means that the HK dollar is undervalued by almost 50 percent.

Why is the HK dollar so cheap? Because it is pegged to the US dollar. Since 1983, the HK dollar has been pegged to the US dollar in a narrow band at the rate of US$1 to HK$7.8. Without this peg, the HK dollar would be valued considerably higher against the US dollar. The Hong Kong Monetary Authority uses HK dollars to purchase US dollars to artificially hold down the value of the HK dollar. Every day that the HKMA maintains the currency peg, it cedes control of its monetary policy to the US Federal Reserve. In other words, Hong Kong’s monetary policy depends de facto on the US Fed.

This situation has been maintained for 35 years, and it has worked well. Nevertheless, when it comes to property prices in the SAR, this currency peg may have a negative effect. The Fed has been systematically raising interest rates, adopting a policy of gradual rate rises. The 2008 recession caused the Fed to lower its benchmark rate to 0.25 percent, which is effectively zero. It stayed there for seven years until December 2015, when the Fed raised interest rates to 0.5 percent. The Fed has since signaled it would raise rates to 2.5 percent in December 2018, 3.0 percent in 2019, and 3.5 percent in 2020.

These last few years, low interest rates have been the cause of higher real estate prices, since banks offered competitive mortgages, encouraging a higher demand, but the supply remained the same, since land is scarce.

But this tendency seems to have changed, since the Fed is raising the rates much higher than before (for example, 2 percent on June 2018 versus 0.75 percent on December 2016): Higher interest rates will theoretically cool Hong Kong property prices. This implies a change of policy, which, at first sight, would seem good. However, it has its clear disadvantages as well: If interest rates increase, funding costs for homebuyers will become more expensive.

My point is that the city’s real estate prices depend to a large extent on the decisions of the US Fed: If interest rates are kept low, property prices will increase because banks will offer more competitive mortgages, encouraging higher demand but keeping the supply unaltered, while raising interests will imply the SAR’s property prices cooling down but mortgages becoming more expensive. Both low and high interest rates would create problems for the real estate market, so a question arises as to whether the HK dollar should continue to be pegged to the US currency.

A vigorous debate has been going on for years as to whether the HK dollar should continue it peg to the US dollar or should it be pegged to the RMB instead?

In my opinion, now is not the right time to unpeg the HK dollar to the US dollar, because the HKMA has still the capacity to defend the linked exchange rate system and there is a clear political will to defend the exchange rate. A de-pegged HK dollar could be linked to a basket of currencies, like the Singapore dollar, or be pegged to the yuan. The only reason the HK dollar must unpeg to the US dollar would be to peg itself to the RMB, which is premature at present.

However,  in the long run, the Hong Kong dollar’s link to the US dollar is likely to be replaced by a link to the onshore yuan, or the HK dollar will be replaced by the yuan itself. But, as of today, given that the yuan is not fully convertible yet, unpegging the HK dollar from the US dollar would be too risky. 

To sum up, the HK-US dollar peg has a negative impact on our real estate market, since Hong Kong’s monetary policy depends de facto on the US Fed and, as we have seen, the Fed’s decisions of reducing or raising interest rates always affect HK’s property market, in one way or another. That is just another reason why I think it would be unwise to unpeg the HK dollar to the US dollar now, even if it affects negatively the real estate market. As I said in my article “Singapore’s sell-by date could solve land hoarding in Hong Kong” (July 27) and in “Hong Kong needs to think creatively to resolve its housing problem” (Sept 4), high property prices in Hong Kong have many different causes.  It requires a multipronged approach and wide consensus, giving time for everyone to think outside the box. If I were asked about it, focusing on the monetary policy to resolve Hong Kong’s housing issues would  probably be the last of my priorities: Increasing the supply of land (through land reclamation, brownfield sites, reducing country parks…) and controlling land hoarding by developers should be the top priority. 

The author, holding a doctorate in Hong Kong real estate law and economics, has published many articles about Hong Kong public housing, town planning law and land policy. He has worked as a business analyst for a Hong Kong publicly listed company.

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