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Bernanke and Pinball Could Learn A Lot From Hong Kong’s Property Bubble

Housing-Market / Hong Kong Nov 17, 2009 - 02:51 AM GMT

By: Andrew_Butter


Best Financial Markets Analysis ArticleMany years ago I met an old sweat Brit from Hong Kong, he told me two things (1) Hong Kong is the closest you will ever get to a pure free-market economy (2) that’s because it’s regulated.

He was absolutely right, it’s funny how health services, education and public utilities in Hong Kong are the best in the world and everything works, yet you step back and for a second you would think it’s a socialist dream. It’s not, it’s Adam Smith on Speed.

Another thing about Hong Kong is something that Simple Ben and Ann Ryan’s Pinball Prodigy and even perhaps Moron Gordon might learn from.

That is (a) bubbles are very dangerous to free market economies, like the ultimate kiss of death; (b) it’s not hard to recognise them ( ) (c) tinkering with interest rates is an exercise in futility if you want to either prevent one, or mitigate the damage that happens after they pop.

And yet just a few days ago Simple Ben declared at a NYC University shindig:

 "I would have used interest rates to stop the housing bubble, but it is hard to tell if you are in a bubble".

That was following faithfully in the great tradition of Pinball who remarked once:

 “If the market can’t recognise a bubble then how can I?”

Sure Pinball, try applying brain, rather than, “so to speak”, figuring out after spending eighteen years destroying the American market economy that:

“A flaw in the market that I perceived was the critical function and structure that defines how the world works, so to speak”

…”so to speak”…try learning how to speak English too!

The actions taken by the Hong Kong Monetary Authority recently to guard against a serious bubble re-emerging in their property market could have been lifted straight out of George Soros’ playbook; they mandated that the maximum LTV on home mortgages was 60%.

Imagine what that would have done to the US Housing bubble if Pinball had done that in 2003!

This is my take on the Hong Kong property market (annual data):

Note: The “Equilibrium” value is what some people call “Fair Value” although my approach to valuation is to use International Valuation Standards (IVS) where “Fair Value” is a meaningless expression; “Other Than Market Value” (OMV) is essentially what the price should be if there wasn’t a bubble which is something the person doing the valuation is (always) supposed to work out (if he is competent, or unless he is in America or UK and uses US GAAP or IFRS in which case he can just make it up as he goes along, which is one reason they get into so much trouble over there).

So yes there is a bubble or more precisely there was a bubble and it was a big one (about 36% mispriced in 2008 by my estimate).

Although in fact that may be an over-estimate because the OMV estimate is based on demand for housing by people living in Hong Kong and doesn’t account for buyers from “out of town”, for example wealthy Chinese buying a pad in the Big City, which is difficult to track accurately.

What that does is effectively remove stock available to people living in Hong Kong, that’s not a bubble particularly though, that’s supply and demand.

The way to combat that (i.e. to make sure that the residents of Hong Kong have accommodation available that is consistent with their economic circumstances and stable economic development in Hong Kong), is to open up more land for development.

The logic there is that whenever housing gets too expensive in relation to the economic circumstances of a country (or city) that destroys segments of the economy.

That’s what happened in USA, what really drove jobs out of USA to China and Mexico was the excessive house prices, and as American and Brits are finding out the hard way, it’s a lot easier to keep hold of jobs and the economic infrastructure that sustains them than it is to bring them back once they gone.

It’s all very well saying you are going to “innovate”, but the reality is that bubbles are just a way for crony capitalists to grab an unfair share of the product of past “innovation” at the expense of ordinary people, they are zero sum; fat cats win and ordinary people lose, no different from how monopolies distort free markets.

Hong Kong traditionally handles that quite efficiently by selling land for development, although developers are complaining that the land reserve price on land-sales is too high.

The developers have a point, setting the land prices by where the bubble prices reached does no one any favours, first because it constrains development which fuels the bubble, and second because bubbles pop, that makes real estate development risky, which in turn can cause economic damage when they all go belly-up, which is also why developers in those circumstances like to focus on building products targeting the external (luxury) market rather than for the internal market.

A better strategy would be to base land sales on OMV and instead of screwing the developers for the best price, to make sure that they build (some) stuff which is consistent with the needs of the economy (i.e. more affordable housing rather than luxury penthouses for rich Chinese).

By the way much has been said about the 1997 “bubble”, in my opinion that “bubble” was caused mainly by the drop in economic activity after Hong Kong was handed back to China, the appreciation of prices up to about 1993 was simple supply and demand although the government could have done something to increase supply to avoid jobs going elsewhere, which they did.

Either way, it looks like some “players” might have had some fun over the past few years in Hong Kong, particularly thanks to all the free lunches that Simple Ben was handing out at the expense of the American taxpayer via the carry trade (thank you Ben, thank you very much), but it looks like Big Daddy in Hong Kong woke up, so that might be game over soon.

So anyone who has some “wasta” in the superbly corrupt US banking system and is inclined to find another place to play with the American tax-payers money that they seen so determined to throw away – try Dubai.

Better hurry though, it looks like the last death rattle might be near and that quite soon America might actually run out of money.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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