Thursday 12 April 2018

Hong Kong real estate pops on rising USD Libor?

I have written a few blogs on monetary inflation post-08 and how as its power wanes the crashes get closer to the source the sources being the Fed and PBoC.

Well, there are signs that global prime residential is rolling over; London, Manhattan, Toronto are all off 'bigly' with much further to go in my view, Dubai is grinding lower partly on high supply, partly the lower oil prices. Some other markets seem to still be powering higher, notably San Fran and Hong Kong.

Always hard to time the top but the rise in Libor in USD is hurting the pegged currencies. Dubai seems to mainly be a local cash second home market, but Hong Kong is clearly leveraged up the wazoo.

Now the HKMA is starting to intervene to maintain the peg. The only problem is there is almost an unlimited amount of forwards than FX traders can sell and all the HKMA can do is shrink the private sector money supply to maintain the peg. Genuine capital outflows face the same problem, they cause a shrinking domestic money supply as HK$'s in the money supply get given to the HKMA in exchange for USD$ reserves held by the HKMA. That has to cause a credit crunch in the same way that inflow caused credit expansion on the way up.

I'm not sure what mechanisms the HKMA could use to try and sterilize these effects but either way the market seems to be witnessing a ridiculous blow off top phase. If the HKMA just expands private credit at the rate of interventions, then presumably it could face a Black Monday type event were outflows beget outflows.

China is also curtailing credit expansion and may see to limit capital flight more going forwards.

An article on residential property and some relevant charts below:

I don't have time to dig into the components behind the numbers but at a headline level since end-2008:
  • National income is up about 30%
  • GDP is up about 47%
  • M3 money supply is up ~130% 
  • M3 is now circa HK$14Tn vs GDP of 2.7Tn, so 520% of GDP
  • Bank balance sheets are up a similar % amount as M3
  • Loans to the private sector are up from HK$3.3Tn in Jan 08 to HK$9.5Tn, almost tripling with many priced in foreign currencies.
  • Construction as a percent of GDP is about 4.4% and has doubled since the crisis vs an economy that is up a lot less than that
  • House prices are up 140% from 2009 to Dec 17

What could possibly go wrong?

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