Since the tumble in 2003 the housing market in Hong Kong has bounced back from the trough and skyrocketed over 300%, while GDP of the city has merely grown less than one third of that. Owning an apartment is now a far fetched dream for younger generations. This has led to a multitude of consequences from lower birth rates to the rise of extreme political powers, undermining the govenerning authorities status quo.

The realty price has gone out of reach for Hong Kong citizens. From the beginning of the new millennials to 2008, households with median income tended to pay off the debt within 10 to 15 years. However, starting from mid 2009 there is a dratic change in the landscape of the property market, where it is frequently seen for families to spend 30 times of their annual income for their apartments. These figures are based on their household income. Considering the inflation in the past decade, the discretionary income for households after purchasing a home might have been further squeezed.

Rent, which is an indicator for demand in accomodations, does not catch up with the skyhigh sale prices. It picked up different paces for different sizes of apartment. Using 2002 as the base year, rents are up on average 91% while sale price are up 284%. The demand is apparanetly falling behind, suggesting the price surge is not underpinned by actual need but merely a mirage of bubble. More interestingly, rents for domestic flats type A (with living area < 40 sqm) has risen more than a double then large apartments (> 100 sqm). This indicates a shift in households preference from renting large apartments to smaller ones, evidencing a loss in affordability.

As the US housing bubble collapsed in 2008, Lehman Brothers, Fannie Mae, Freddie Mac and AIG failed one after another, a serious credit crunch hit the continent. This led to a series of quantitative easings. Through QE the US Fed injected liquidity through buying treasury notes, mortgage backed securities and bonds. As a result, the Fed balance sheet expanded, from pre-crisis level of $900b, to $4.4t USD recently. A large amount of USD was created from nothing and spilt over to other safer heavens or to look for better returns.

Hong Kong is one of the shelters for the US money due to its pegged exchange rate with the USD. Funds from the US rushed to Hong Kong to seek higher yields. Under a series of easings, Hong Kong has expanded its foreign reserves at an unprecedented pace. At the time of writing, it has risen by 113% since the crisis.

One direct result from this inflow of dollars is the expansion of HK’s monetary base. The HK Monetary Authority, which is the central bank of the city, needed to issue more HK dollars in response to this raging demand and to keep the HKD/USD rate within the band. In fact, the M0 had been steadily declining between 2004 to 2008. From August 2008, nevertheless, it rapidly rised to almost 4 times of the pre-crisis level, reaching an all time height of HKD$1.6t. Since the turmoil HK has topped up HKD$1.56t to the reserve and issued an extra HKD$1.28t to circulation.

Interestingly, the growth in monetary base did not result in much inflation. The side by side comparison showed that the CPI growth before and after the crisis has just hit 27%, which concurs with the growth in household income but is largely disproportionate to the M0 growth. This suggests that the money has been directed to the asset markets instead of the hands of the people.

Excess money entering the property markets will almost definitely to stir up prices. The total mortgage outstanding for the market is just of size about 1 trillion HKD. Considering the vast size of money inflow, only a tiny fraction would have sufficed to exhilarate the market.

The root of all evil is Hong Kong has too much hot money in circulation thanks to the peg, while this money does not produce economic benefits, it perturbs our younger generations and put them into despair.

On looking forward the US is approaching its full employment with inflation coming back to target, amid the short term shock of Brexit. The tempered rate hike will likely to resume gradually. One should keep an eye on the rates but also the other eye on the Fed balance sheet as the bond rollover will taper anytime not long in the future.