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In Hong Kong $1.8 Million Gets You 400 Sq. Feet, And Other Observations On The Biggest Bubble Ever, From Dylan Grice

Tyler Durden's picture




 

For those who wrongly believe that the biggest real estate bubble in the world is in Manhattan, the following may come as a surprise: according to Dylan Grice, in central Hong Kong, a 400 sq. foot property recently sold for HK$14MM, or about $1.8 million: an insane $4,500 per square foot. And that's just the beginning. Yet, as we have started to speculate recently, is this precisely the goal of Ben Bernanke - to create pockets of silly inflation within China so that the country is eventually forced to unpeg the CNY? If so, this is a huge gamble, as the bulk of the country still has far more slack than America ever can. And while China, and the bulk of its wealthy citizens, continue to pretend there is no bubble (created by the same free credit mechanism that results in the 2008 near-death of the US economy), has, as Dylan muses, China "already lost control? And if so, who's to say what will happen if the asset inflation goes into reverse? Maybe when the authorities engineer the slowdown they desire and tell investors it's safe to buy again, those investors  won't want to buy. In which case a hard landing shouldn't be beyond the realms of imagination." Grice then proceeds to explain the obvious, namely that the fall out of the inevitable collapse of the Chinese bubble will be unprecedented, as not only the EM world, but the developed economies have all hitched their fates upon the successful continuation of the Chinese bubble - the same bubble Bernanke has to unwind to get the much desired CNY reflation. Grice says "Go to Ireland and ask them how they feel about bubbles. They'll tell you a bubble is a curse, not a blessing." Of course, Ireland is about to be bailed out. Who, however, will be able to bail out China when the overheating economy gets it trillions in loan supports taken out? That one not even Chairman Ben will be able to rescue...

In his must read piece which once again explains why the Emerging Market bubble is the greatest threat to the entire world, a theme which little by little is getting ever more traction, Grice first looks at a post-bubble economy. That of Japan.

I worry that Japan is a leading indicator for the rest of us. One of the things that struck us most while wandering around the place was the absence of energy. The bustle and zip I remember from my first visits to Tokyo was gone. So is the hope that things would soon turn around. There are more grey hairs than black - and people are asleep everywhere! In Starbucks, in restaurants, on the metro, on the buses and even in the shopping malls - Tokyo feels like a city which is sleepwalking.

Japan is the most rapidly aging society in the world and I believe the demographic contraction, which is only now beginning, has been the single most important factor in stretching the government balance sheet to breaking point. Is this what the future looks like? There is no panic. There is no sense of crisis. But neither is there much hope. Just resignation, apparently.

A great time for contrarians to invest? Hmmm ? I'm sure there are some good stocks around, but the Japanese market isn't cheap. The Shiller PE for the Topix currently stands at around 20x, about the same as that for the S&P500. If 20x is too rich for the S&P500 (historically you've made virtually no real long-term returns investing at such levels), its most definitely too rich for Japan, where the population is projected by the UN to shrink at an annual rate of -0.7% over the next forty years. I think someone recently argued that Japan was the unacknowledged "Tiger of Asia." Andy and I thought it looked more like a stuffed tiger.

This is why the comparison with Hong Kong could not be more shocking (and more deja vu-ish). Here is how Grice views the former British colony:

It's been a nice change to be surrounded by such optimism! It caught us out though. Investors here have generally been disinterested in the developed market's problems. With one or two exceptions, the vast majority of people we met had little interest in the instability which might be unleashed by a more serious run on the debt of a larger Eurozone government than Ireland or Portugal, or the de-securitization of allegedly fraudulently foreclosed properties back onto US banks' balance sheets. Neither are they worried about the inflation risks that are building from the ballooning of developed market government balance sheets.

The apparent disinterest in the seriousness of developed market problems is reflected in the media, which aren't filled with stories of impending doom like they are back home. There is no talk of fiscal crisis or of painful deleveraging. There is no scapegoating of bankers' greed or politicians' incompetence - at least none for the moment because such things feature in post-bubble economies...

Instead the papers are filled with tales of another record property deal (a 400ftsq property outside the SG office in central Hong Kong just sold for HK$14m; The Economist newspaper recently ranked Hong Kong as the second most expensive property market in the world, calculating it to be 58% too expensive.

Last weekend's Sunday Morning Post reported that Sotheby's and Christies will raise more money from wine sales in Hong Kong this year than in London and New York combined. Vintage bottles are "better than stocks" according to the piece. And on the mainland, nearly four hundred years after the Tulipmania, speculation is said to be rampant in ...er...  caterpillar fungus, of all things.

Why are China's residents - traditionally so careful (growing up under a communist regime will do that to you) - throwing all caution to the wind? Here is one possible reason.

Like the other derivative plays on China and India, (e.g. Brazil, Canada, Australia) HK had a "good" crisis. So they feel confident that they can cope with whatever fate throws their way -  fair enough - but having a "good crisis" can be a mixed blessing. The US had a very good EM crisis in 1997/98 only to fall victim to the tech bubble; Japan had a very good crisis in 1987 when world stock markets crashed, and was rewarded with the greatest real estate bubble in financial history a few years later; the US had a good crisis in the mid 1920s, as the UK struggled with the self-imposed deflation of a painfully overvalued exchange rate, only to  be flattened by the stock market crash of 1929.

Why might having a "good" crisis prove such a poisoned chalice? Perhaps because countries pay more attention than they should to what's happening to their neighbours, keeping monetary conditions lower than the domestic climate would ordinarily merit. This was certainly true of Ben Strong's US interest rate policy in the mid-to-late 1920s when there were difficulties in Europe; it was true of the BoJ's monetary stance following the crash of 1987; it was true of the Greenspan's emergency stimulus following the EM crisis of 1997/98; it is true of EMs today, running policy which is overly calibrated to what's happening abroad.

Here Grice once again returns to his recent meme that it is in fact China's fault for not letting its currency appreciate, and in doing so not only is it reaping the benefits of having a monetary policy that mimics that of the Fed, but an FX regime which allows it to extract far more benefits from the globalized system. The only Achiles Heel - inflation. And that is what Grice believes will bring the whole theater down.

It feels odd defending beleaguered Ben Bernanke and his central bank brethren, but they're not the only "villains of the piece" here. EMs have more robust growth, faster productivity gains and an altogether brighter future. Their currencies should be allowed to reflect this. China has negative real interest rates and a deeply undervalued exchange rate with which the other Asian economies are trying to maintain parity. The Fed might be stoking the flames, but the EM's are doing themselves no favours by not tightening much more aggressively here.

Which of course brings up the old staple of decoupling, which ironically is most relied upon as a driving force of growth, just before it is proven to be a lie (see 2007).

What effect will continued financial problems in the developed markets have on EM? Ironically, I think the worse developed markets get, the stronger the emerging-market narrative becomes. EM is the antithesis of DM, after all. Solvent governments, better demographics, harder working populations, etc.

So, much as I fret about the various problems in developed markets, I'm not sure those problems will be enough to puncture the emerging-market narrative, although they'll certainly set EMs back from time to time. The only thing that will remind investors there is profound risk as well as very attractive growth in EMs will be a problem within the EMs themselves, and the most obvious risk here is China. Indeed, perhaps the most surprising (and worrying) feature of our trip so far has been the almost universal conviction that China cannot hard land.

Its administrative controls work with far more precision than the one-dimensional interest-rate adjustments our central banks use, we are told: when the authorities tell investors to buy, they buy; when they tell them to stop, they stop. Today the authorities are adjusting reserve requirements and restricting multiple-home ownership as well as raising interest rates as we speak. Moreover, the regulators are terrified of a bubble and acutely alert to the danger.

And yet, very little happens. And here is the kicker. Grice speculates that unlike the Fed which at least pretend to be ahead of a bubble (although we know now this is only a myth), could China's regulators (PBoC et al) in fact realize that it has already lost control? If so, the repercussions are tremendous, as the entire world is now driving at 60 miles headed straight into a brick wall and nobody is even attempting to be behind the wheel.

But, but, but ? but: regulators have rarely been a match for the folly of mobs intoxicated by the prospect of instant riches. And if the Chinese authorities exert such precise control over the behaviour of their speculative classes, why haven't they been able to cool down the credit inflation this year, which remains well above target? Why haven't they been able to eradicate the underground banks funnelling lending into ventures that are officially forbidden? And why haven't they cooled land price inflation, which remains rampant? The authorities have been telling investors to stop buying property all year, yet still they buy.

Is it possible they've (sharp intake of breath) already lost control? And if so, who's to say what will happen if the asset inflation goes into reverse? Maybe when the authorities engineer the slowdown they desire and tell investors it's safe to buy again, those investors won't want to buy. In which case a hard landing shouldn't be beyond the realms of imagination.

The risk: a complete collapse of everything, and the biggest deflationary collapse in history, which is precisely why the Chairman's last response at D-Day will be to print an infinite amount of money to save whatever Keynesian remains are left.

Forget US deleveraging, this represents the largest deflationary risk to the world economy. Yet it was universally dismissed by everyone we flagged it to! As far as I'm aware, no economy has managed to industrialise without hitting a few speed bumps along the way. Some Chinese bumps are overdue and to my mind the question is when, not if.

How much time is left?

So when? As regular readers will know, I have no expertise in guessing these things (if only!) But for the very little it's worth, I think we're still a year or two away because I don't think they're tightening fast enough. History suggests the point of maximum danger to be when the authorities react too aggressively to late-cycle inflation, and I don't think we're there yet.

Markets have taken fright that the recent surge in inflation reported last week will bring about such overkill. And that's certainly possible (see the Popular Delusions of September 24th, and soon to be updated for some cheap insurance ideas on this particular "tail"), but the inflation is currently driven more by food prices. This doesn't make it any less real, but it does ensure a different response, and one that will be aimed specifically at food price controls and probably the scapegoating of merchants.

This is totally inappropriate. Not only do such measures rarely work since they exacerbate the problem by sending food prices even higher - indeed, it makes me even more bullish on agriculture, which is one of my three bubble candidates along with EMs and gold - but price controls on agriculture do nothing to address the key engine in the EM narrative today though - China's credit inflation.

One thing is certain: the end, as fatalistic as it appears, is coming, and judging by today's token 50 bps RRR hike, may be closer than expected.

Financial historians have shown that every single financial crisis since the 1870s has been preceded by rampant credit growth. So long as China's credit growth continues at its current pace, aided by the liquidity the Fed is flooding world markets with, and encouraged by artificially low interest rates, the primary risk EMs face today remains that of a bubble.

This might sound a very bullish note on which to end. It isn't. And let me be crystal clear about why: a bubble is not a bullish scenario. It's not bullish for the EM economies themselves, their citizens or for the world as a whole. The fact is all bubbles end in tears. The innocent bystanders who go to work not realising that their jobs derive from unsustainable demand suddenly find they're out of work, through no fault of their own. The investors who believe the hype - generally but not exclusively naïve retail investors - get completely wiped out, or worse find themselves in debt after leveraging into the story. Those who are sceptical, but play along thinking they'll exit before everyone else are rarely successful. And investors who refuse to participate as the bubble inflates face business risk and career risk. Go to Ireland and ask them how they feel about bubbles. They'll tell you a bubble is a curse, not a blessing.

 

 

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Fri, 11/19/2010 - 13:43 | 741548 Cognitive Dissonance
Cognitive Dissonance's picture

.....central Hong Kong, a 400 sq. foot property recently sold for HK$14MM, or about $1.8 million: or an insane $4,500 per square foot.

At least now we know where WB7's crib is and how far underwater he's gonna be. :>)

Fri, 11/19/2010 - 15:01 | 741553 williambanzai7
williambanzai7's picture

Rather than addressing each of the points in the post, I will provide my take on the situation here:

JAPAN: I lived there for a few years when I was a kid. In the past 20 years Japan has regressed. You get off the plane in Tokyo and you feel like everything is a struggle, why does my phone not work here, where is an ATM that operates in English, why do I have to pay $200 to get into town, why does my hotel concierge not understand anything except what is in the concierge field manual.

There is an exciting part of Japan. It is the young creative crowd. But they are not driving the economy which is basically struggling to protect legacy wealth.

SHANGHAI: Shanghai is the most exciting city on planet Earth. Everything that is cool and cutting edge is in Shanghai. You have never been to a real entrepreneurial city until you have arrived in Shanghai. You feel the vibe in the streets. Shanghai people consider themselves Shanghai people first and foremost. For a reason. They work hard and play hard.

Shanghai people also have a battery on their shoulder about Hong Kong. They don't understand why Hong Kong should be the financial capital and not Shanghai. The simple reason is most foreign bankers in HK are afraid to move to Shanghai. 

Pudong is the section of Shanghai that is the financial center. It has been massively over built with commercial office space. The joke is  "so many offices, who do they have sitting them?" I would say long term China will move the center of financial gravity to Shanghai, despite what the foreign bankers think.

You ask a typical Chinese person what is serious investing and what is for fun. The answer will be real estate comes first. That is the Asian mind set. You buy a flat and rent it out while you are still living in a rented flat. Once you have paid off the loan on the first flat, you move in and buy another one to rent out. This mentality exists irrespective of whether there is a bubble. 

HONG KONG: Hong Kong has three kinds of people, financiers, industrialists and tycoons of various sizes and working people. Currently the financier cockroaches are all over Victoria Island. This drives the price of rental properties sky high. Successful tycoons and business people live in very expensive homes. They always have. Hong Kong has a finite amount of residential space. When you read about the super crazy residential deals, they are primarily in hideous buildings built primarily for rich mainland Chinese who want a showpiece place in Hong Kong. When the crash comes, those will be the first to go. 

Which brings me to the working people and middle class. There a plenty of them and they live in very small but comfortable apartments about the size of a NYC 1 bedroom but with 2 bedrooms. They either own or rent for about USD 1000-1500 per month. Many live in 1 bedrooms the size of a NYC studio.  They follow the buy one and rent another strategy I described above. They can live very comfortably because produce and other necessities are not expensive because they are produced relatively close by. They also never have to worry about medical bills because medical here is dirt cheap, readily available and highly competent. Cars are really just for show because the mass transportation here is the best in the world. The education system (public and private) is also well run.

Most important, Hong Kong is safe. So if you happen to live in a "low rent" neighborhood, you are still safe and don't have to worry about crack dealers and muggers.

Perhaps the most important thing to remember, is the cultural gestalt that pertains to cycles and risk. The great YIN and YANG. This is Asian culture. Everyone knows what goes up will inevitably come down. For them timing is everything. Let me tell you, Asians know how to scrimp, save and get by on what Americans consider scraps. You may have heard this. It is absolutely true. Their tolerance for hardship dwarfs our own. They also know how to dump real estate and move the whole clan into one flat. They literally have gold and cash hidden in their walls and mattresses because they still retain the subliminal refugee mentality (be ready to run on a moments notice).

They are much better prepared for the financial apocalypse than we Americans, primarily because they know it can come.  

GENERAL: There is constant talk here about the flood of "gweilo" (white ghost) money. In fact, there is lots of that talk all over Asia. The general consensus is would can do without Bernanke Bucks, please keep them in the US.

But that scumbag money printer and his banksta crew continue to export our currency over here to get a better return and like before it will evaporate on a moment's Soros.

Everyone knows the only solution is to decouple, but it is not that simple.

When the bubble pops, and it will, there will be much anger directed at the good old USA. But the bottomline will be an even greater determination to decouple.

And as we continue in our chronic state of decline, you can bet on one thing for sure, there will be no quarter given by our new Asian overlords if and when that time comes.

Maybe I will take some pictures and post them up to give you an idea of what it all looks like. 

WB7

 

 

 

Fri, 11/19/2010 - 15:02 | 741776 i-dog
i-dog's picture

Great summary, WB. Agree with every bit of it (especially about Shanghai and the incredible Shanghainese).

Fri, 11/19/2010 - 15:06 | 741788 RobD
RobD's picture

Thanks WB, very nice right up. I also lived in Japan for a time and visited Hong Kong in 86. Hong Kong was a lot more fun for a poor sailer on liberty then Japan.

Fri, 11/19/2010 - 15:08 | 741795 williambanzai7
williambanzai7's picture

Still is ;-)

Fri, 11/19/2010 - 20:41 | 742530 jm
jm's picture

In some ways Japan has changed for the better.  Japanese young people, although still very nice by any standard, are much more open and willing to call bullshit.  I mean this in a good way. 

It gives social situations an easier feel... much more natural.  You don't have to guess the minefield of complexities going on in the background as much.

 

Fri, 11/19/2010 - 15:09 | 741797 -273
-273's picture

Interesting comment man, thanks for taking the time to write it.

Fri, 11/19/2010 - 15:25 | 741842 shushup
shushup's picture

Thanks for this info. Very interesting. Would love to see photos. Have never been to that part of the world.

Fri, 11/19/2010 - 15:38 | 741866 Divided States ...
Divided States of America's picture

HK is experiencing all the pent up home price inflation because its treated as a 'resort' for all the wealthy mainland chinese. They MUST own something in HK, thus they could care less how much it will cost them because simply put, they can afford to. Poor for people who actually lives there and wants to own a place but simply just cant afford to...so they rent.

Secondly, the HKD being pegged to the USD is actually distorting the true pricing mechanism in HK. To alleviate this issue, HKD should be depeg from USD and pegged against the CNY. Then HKD will appreciate 20% and HK condo prices will not appreciate as much.

Like WB7 said, HK truly is a magnificient place to live in, if you already have a place to live (paid for) and if you have a decent job (15% income tax there really makes a diff)

Fri, 11/19/2010 - 16:53 | 742073 Fat Ass
Fat Ass's picture

It is amazing to see someone on the Internet who actually knows what they're talking about.

Perhaps you just landed on it accidentally or something :)

Fri, 11/19/2010 - 16:54 | 742077 Fat Ass
Fat Ass's picture

It is amazing to see someone on the Internet who actually knows what they're talking about.

Perhaps you just landed on it accidentally or something :)

Fri, 11/19/2010 - 18:36 | 742321 zero intelligence
zero intelligence's picture

"Why does my cellphone not work?" Because it is not a Japanese cellphone. Duh?

"Why does it cost $200 to get from the airport to the city?" Because you are an ignorant foreigner who can't read the signs that say you can take the Keisei Line to downtown for Y1000, or about $12 in your ever-cheapening currency. The train station is just down the stairs after you exit the baggage claim.

"Where is an ATM that operates in English?" Where in New York is there an ATM that operates in Japanese? If a Japanese person asked you this, could you answer? If a Japanese person asked you this IN JAPANESE, could you answer?

"Why does my hotel concierge not understand anything ... etc?" What do you think happens when a Japanese person talks to a New York hotel concierge in Japanese? I once read a Japanese guide to hotels in New York. It said, "You must not expect good service, no matter how expensive the hotel." Japan still has the best service in the world.

"Why are Japanese so backward?" Because you are an UGLY AMERICAN. It worked in the 1950s, today nobody gives a crap about ugly poor americans who complain too much.

 

 

Fri, 11/19/2010 - 20:13 | 742501 kiwidor
kiwidor's picture

Such penetrating rationality.  Impressive.

Sat, 11/20/2010 - 01:38 | 742746 williambanzai7
williambanzai7's picture

Having lived in Japan and China, being of partial Japanese descent, being able to speak and read basic  Japanese and Mandarin provides all the street cred I need to formulate my view.

Living abroad half my life also qualifies me to call a moron from Barneyville when I see one.

Sat, 11/20/2010 - 05:29 | 742870 Non Passaran
Non Passaran's picture

You make some valid points, but unfortunately in poor style. Zero intelligence indeed.

About his phone complaint: both in S. Korea and Japan one can rent a phone (if the visitor happens to come from a country with outdated mobile phone standards out of sync with the modern world - we know which country that is ;-))

About English ATMs: there are some English ATMs at the airport and in most good hotels.

Quality of services in Tokyo (and Japan in general) is superior. The language barrier is not such a big deal for a visitor if one considers the overall "value", although the strong Yen is a big spoiler these days :-)

Sun, 11/21/2010 - 13:35 | 744519 joshuachan
joshuachan's picture

"Why does my cellphone not work?" Because it is not a Japanese cellphone. Duh?

- what gives japanese the divine right to have a separate system for everything without losing their own international competitiveness? My phone cell would work in the US, China or Europe without major issues.

Because you are an ignorant foreigner who can...

- Never been there but I assume there is no english sign, which would be funny since it is an INTERNAITONAL airport

"Where is an ATM that operates in English?" Where in New York is there an ATM that operates in Japanese? If a Japanese person asked you this, could you answer? If a Japanese person asked you this IN JAPANESE, could you answer?

- because English is THE international language. Everyone who doesnt speak a word of the local language, should be expected to conduct the communication in English. Why is this even debated? Are we back in the 1870s? 

"Why does my hotel concierge not understand anything ... etc?"

- once again, tell the japanese to finally start learning English. Look at the Chinese. They have larger economy, much higher growth, much brighter future, and EVERY student learns english.

"Why are Japanese so backward?" Because you are an UGLY AMERICAN. It worked in the 1950s, today nobody gives a crap about ugly poor americans who complain too much.

- THey are fuckin backward and I aint an American. 

Fri, 11/19/2010 - 22:21 | 742699 MsCreant
MsCreant's picture

Your comment drew me a wonderful picture. Thank you.

Sat, 11/20/2010 - 06:00 | 742877 Non Passaran
Non Passaran's picture

JAPAN: still offers superior quality of service. English ATMs aren't hard to find, trains (including the one from Narita to Tokyo) are convenient and cheap (and the bus - with impeccable service - is comfy and about $40 for one way ticket).

(I want to keep this one brief but I have to say this: I can't imagine that anyone - except perhaps a rich person or someone who can expense it - would take a cab from Narita to Tokyo and then complain (a rich person wouldn't and someone who could expense it wouldn't either). It sounds like you didn't bother to check the distance or fee (easy at the airport information counter) and later someone gave you shit about the expense. The comment about a $200 ride is extremely surprising considering that you claim to have some understanding of Japanese and that English information service is readily available at the airport. DYOD, dude!)

HONG KONG: If "Japan has regressed", so has Hong Kong in terms of English language skills (and because of the influx of mainlanders their Mandarin skills are better). Those "hideous buildings built primarily for rich mainland Chinese" will be the last to go, not the first as you say.

SHANGHAI: It's not bad, but your praise is overblown. What about the pollution, the ridiculous congestion on the subway, the inability to get a cab every time it rains, the rush hour that sucks, etc. Hong Kong is a much better environment for international business (of course, many companies need to have presence in both cities).

GENERAL: There is no constant talk here about the flood of foreign money unless you work in that line of work. People do talk about it, but they know why it's happening and go about their business.

IMHO only about 75% of what you wrote in this comment is correct.

 

 

Sat, 11/20/2010 - 08:18 | 742945 The Real Fake E...
The Real Fake Economy's picture

I agree that Shanghai is indeed the most exciting city in the world, and very happy to be living here right now (despite my 3rd bike getting stolen in the last 5 months!)  This coming from someone who grew up and lived in NYC for almost 25 years. 

Sat, 11/20/2010 - 16:21 | 743373 ThreeTrees
ThreeTrees's picture

Fucking awesome writing.  You painted a vivid picture.

 

More like this please.

Sun, 11/21/2010 - 10:58 | 744246 YHC-FTSE
YHC-FTSE's picture

+1

 

Pretty good assessment, I think from a younger person's POV. I don't know whether this still holds true, but in my day the USD was the currency of choice for that "emergency cash" people in the region hoarded - same probably all over the world in developing regions. When that goes South, they are likely to lose a large portion of their accumulated wealth that was so hard won in the first place. Perhaps they'll get wise before it's too late and covert to metals. I am surprised to learn that Bernanke's USD is as welcome as a turd in a swimming pool these days in the region. 

 

On the same theme, paper currency is a conceptual instrument of convenience, nothing more. Little you can do with it except burn it when nobody trusts it any more. But I have a feeling that part of the problem which is hampering the Fed's insane efforts to trigger hyperinflation is the fact that hundreds of millions of non-Americans all over the world still trust the USD as the currency of choice for emergencies. It's a bit like reckoning that instead of ~300m American workers who have the burden of paying for the Fed's spending in the next few decades to come, 1B+ people around the world will take up the slack to offset the lost value of the USD. As long as these people keep trusting the USD by working hard and buying the paper off Uncle Sam, it is highly unlikely go out of fashion as the world's reserve currency. But of course, when that trust disappears, we are going to see something out of a defunct African state in the US overnight. 

 

Could be faulty logic - Just thinking aloud.

Sat, 11/20/2010 - 07:53 | 742932 Zero Debt
Zero Debt's picture

How are you so sure he is not selling? ... :)

Anyway, as I live in HK as well I wish to add a few points...

HK property is less leveraged than in US, but, rates are mostly tied to HIBOR which follows short-term rates (which seems to be targeted by the Fed), unlike US which has much more fixed-rate mortgages. Hence HK is very vulnerable to interest rates shocks in (although it's arguable US will ever tighten monetary policy).

HKMA is trying desperately to deflate the bubble, they slapped a 15% levy on properties sold within 6 months of purchase yesterday, it was a pretty serious measure. Ironically this may be good for HK stocks (ex property), as the "hot money" now has to go somewhere else, especially the increase in Mainland M2.

http://www.businessweek.com/news/2010-11-20/hong-kong-adds-tax-intensifi...

LTV in MIP was also changed:

http://www.info.gov.hk/hkma/eng/press/2010/20101119e6_index.htm

http://www.info.gov.hk/hkma/eng/press/2010/20101119e5_index.htm

Sensible flat buyers would probably not rely on anecdotal single transaction evidence, like the ones quoted in the original post, but use more fine-grained indexes like CCI or CCL:

http://www.centadata.com/cci/cci_e.htm

Fri, 11/19/2010 - 13:47 | 741561 MeTarzanUjane
MeTarzanUjane's picture

So misunderstood by so many.

Fri, 11/19/2010 - 14:20 | 741637 traderjoe
traderjoe's picture

Oh, please do enlighten us. Or not. How about not. 

Sat, 11/20/2010 - 08:21 | 742947 MeTarzanUjane
MeTarzanUjane's picture

Ok, I'll let someone else do some splainin to you for starters...

Look down
|
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\/

for Erra's post. It's a start, I'm sure it will go in one ear-out-the-other.

Fri, 11/19/2010 - 14:00 | 741565 i-dog
i-dog's picture

It would be foolish to judge China's economic outlook based on Hong Kong's performance. Hong Kong is a very different place to anywhere else on the planet. Property prices have been in a "bubble" in Hong Kong for most of the 35 years that I have been either living there or doing business through there. It's called 'supply and demand', not a government funded ponzi.

Fri, 11/19/2010 - 14:16 | 741625 Bend
Bend's picture

"Hong Kong is a very different place to anywhere else on the planet. "

 

Just that comment alone is enough to seal the deal.

Fri, 11/19/2010 - 14:22 | 741642 packman
packman's picture

+1

Sorry but a 400-sq-ft property selling for $1.8M as a case for a property bubble smacks of anecdote.  There may indeed be a property bubble, but there needs to be better evidence presented than that.

As you say - Hong Kong is indeed a special case.  It is the single most-densely-populated place in the planet, a longtime financial hub with special economic rules, and in a prime location amongst the largest economic growth engine in the world for the past 20 years.  The fact that high-end property prices there have gone up a lot does not in itself point to a bubble at all.

When/if a general China economic bubble pops - it may well take HK with it.  But not vice versa.

 

Fri, 11/19/2010 - 14:37 | 741691 Dan_Sylveste
Dan_Sylveste's picture

It is an anecdote.

http://www.squarefoot.com.hk/property/3506375

HKD4.6M for 522sqft, well situated, about 5 minutes walk down the elevator to Admiralty/Central/HSBC etc.

This is still high but the article is cherrypicking.

Sat, 11/20/2010 - 03:52 | 742832 1984
1984's picture

uhhh.. .  Hmm...  Isn't the demand in HK driven by government funded ponzi's elsewhere?  What's the diff?

Fri, 11/19/2010 - 13:53 | 741574 buzzsaw99
buzzsaw99's picture

Bernanke shoots, scores! This is a great day for the sport of badminton folks.

Fri, 11/19/2010 - 14:05 | 741594 Horatio Beanblower
Horatio Beanblower's picture

I see your $1.8m and raise you...

 

"Rundown garages on sale for £1.25m 'Britain's most expensive lock-ups'" - http://www.telegraph.co.uk/property/propertynews/7807191/Rundown-garage-on-sale-for-1.25m-is-Britains-most-expensive-lock-up.html

 

That way lies madness.

Fri, 11/19/2010 - 14:19 | 741621 Oh regional Indian
Oh regional Indian's picture

We've got comparable bubbles in RE here in India as well. 

Mumbai, Bangalore, Delhi.... the rise in the past 9 years, especially in th epast 4-5 has been dizzying (small dip in late 08, but otherwise, relentless).

And we do not have an organized real estate sector even. This is all personal investment. Lot's of black money, manipulated valuations, land mafia...

I trust HK might be similarly chaotic, but with a little more accountability/enforceability.

ORI

http://aadivaahan.wordpress.com

Fri, 11/19/2010 - 14:22 | 741641 goldmiddelfinger
goldmiddelfinger's picture

This is the fallacy in Grantham's 7 year performace assumptions. His gamble that emerging markets will outperform. He's looking for a 7% return there versus a wipeout if wrong. 7%. Whoop-te-doo. Just don't be there when TSHTF.

Fri, 11/19/2010 - 14:23 | 741645 MsCreant
Fri, 11/19/2010 - 14:24 | 741647 Erra
Erra's picture

i-dog nailed it.

 

Beyond that HK isn't "China", HK is just where mainlanders come to dump their ill-gotten gains.

HK's property is definitely ridiculous, but it has far more to do with supply and demand issues than anything else. The government of Hong Kong has a very firm grip on land sales pegged for residential development.

Aside from that, the area quoted(Next to SC office, in Central) is right in the heart of the Financial district. The square footage sounds obscene to those in the west because the average size of an apartment here is much smaller. 400 is a large studio or average sized one bed.

Sat, 11/20/2010 - 04:03 | 742837 1984
1984's picture

"... where mainlanders come to dump their ill-gotten gains."

and

"... but it has far more to do with supply and demand issues ..."

 

Aren't you contradicting yourself?  The fact is, property prices in HK are driven by bubble economics just like everywhere else.  The money comes from somewhere.  If the source is ponzi bubble money, whether from the mainland or Bernanke, when the source dries up, what do you think will happen to "demand"?

Why do people insist on fooling themselves that "it's different here"?

 

Sat, 11/20/2010 - 06:04 | 742879 Non Passaran
Non Passaran's picture

Aren't you contradicting yourself?

I don't think he is.

People loaded with money bring it to Hong Kong to buy property, so demand has been high forever.

Sat, 11/20/2010 - 07:36 | 742918 Zero Debt
Zero Debt's picture

dump their ill-gotten gains.

Heard about Macau Casino VIP Rooms?

Fri, 11/19/2010 - 14:27 | 741654 Thunder Dome
Thunder Dome's picture

Obviously, the buyer has not spent much time in the U.S. the last 5 years.

Fri, 11/19/2010 - 14:35 | 741683 Prophet of Wise
Prophet of Wise's picture

"...the dark shadowy angel placed a trumpet to his mouth, and blew three distinct blasts; and taking water from the ocean, he sprinkled it upon Europe, Asia and Africa. Then my eyes beheld a fearful scene: from each of these countries arose thick, black clouds that were soon joined into one. Throughout this mass there gleamed a dark red light by which I saw hordes of armed men, who, moving with the cloud, marched by land and sailed by sea to America. Our country was enveloped in this volume of cloud, and I saw these vast armies devastate the whole country and burn the villages, towns and cities that I beheld springing up. As my ears listened to the thundering of the cannon, clashing of swords, and the shouts and cries of millions in mortal combat, I heard again the mysterious voice saying, 'Son of the Republic, look and learn.' When the voice had ceased, the dark shadowy angel placed his trumpet once more to his mouth, and blew a long and fearful blast. Instantly a light as of a thousand suns shone down from above me, and pierced and broke into fragments the dark cloud which enveloped America. At the same moment the angel upon whose head still shone the word Union, and who bore our national flag in one hand and a sword in the other, descended from the heavens attended by legions of white spirits. These immediately joined the inhabitants of America, who I perceived were well nigh overcome, but who immediately taking courage again, closed up their broken ranks and renewed the battle." -- excerpted from George Washington's Vision recorded at Valley Forge - 1777. This vision is recorded in the Library of Congress at the request of the President.

Fri, 11/19/2010 - 14:55 | 741753 CONners
CONners's picture

For the last few decades, has the consensus ever been that there is not a real estate bubble in Hong Kong?

Fri, 11/19/2010 - 15:47 | 741891 Ratscam
Ratscam's picture

Same prices in St. Moritz or Gstaad Switzerland or Monaco.

But there they only use their condo two weeks per year!

Cool down, 4.5K/feet2 is not average price, probably a penthouse on Salisbury Rd.

Fri, 11/19/2010 - 16:36 | 742033 Fat Ass
Fat Ass's picture

HK prices are completely amazing BUT, it is worth remembering that AT LEAST there is a specific actual reason to want to or need to live there:

To wit, HK, along with Monaco, are obviously  the world's two best place to live considering taxation.

There's a specific, actual reason that "the ticket in" costs so much in Monaco, and it's the same deal in HK.

(Of course, HK has, what, perhaps 30? times the land area of Monaco (50?), so yes the prices arguably have more of a crazy element.)

If J.K. Rowling had simply bought a nice pied-a-terre in Central, she'd now have, what, half a billion dollars that geniuses like Gordon Brown would not have taken from her.

So there's a specific reason for the planet's two or three compact personal tax havens, to be expensive.

One could easily argue that prices of flats in tax-sane citystates will GO UP DRAMATICALLY in the next few years, with all the madness coming.

Sat, 11/20/2010 - 07:40 | 742920 Zero Debt
Zero Debt's picture

While HK is very open in terms of capital, goods and services flows, it is very restrictive when it comes to people flow/immigration.

Sat, 11/20/2010 - 18:46 | 743503 Ratscam
Ratscam's picture

Come on Fat Ass, any Kanton in Switzerland, except Kanton Zurich since 2010, have a fix rate tax system for foreigners who are not earning any Swiss income. 

So if you're a Michael Schuhmacher, 50 million p.a. income, you pay 2.5 million income taxes, 5x your proclaimed yearly expenses.

Try Singapour, St. Kitts St. Nevis, Guernsey, Monaco, Cayman et cetera for better deals, but hey, Switzerland has a land area of 5000 times of any of these places, hence high end RLST prices are up in a sovereign country with their own currency until the USD falls!

Fri, 11/19/2010 - 16:41 | 742043 dark pools of soros
dark pools of soros's picture

so when is all that CIA growing Afghan opium going to flood HK????

Sat, 11/20/2010 - 11:19 | 743053 Client 9
Client 9's picture

>>GENERAL: There is constant talk here about the flood of "gweilo" (white ghost) money. In fact, there is lots of that talk all over Asia. The general consensus is would can do without Bernanke Bucks, please keep them in the US.<<

Hmmm....

The problem with that theory is that most of the growth in China emanates from consumption in America, not China.  If Americans stop buying products made in China, Chinese companies will fall on hard times.  They need America to keep the good times rolling.  However, gradually America will start to impose higher trade barriers to Chinese products and although this will create inflation it will ultimately save US jobs and the US economy.

Sat, 11/20/2010 - 12:00 | 743099 surfsup
surfsup's picture

Playing out just like Japan circa late 1980's...  Trouble is they used grandpa's old tractor design for their monetary system and the resultant oscillations can be like Godzilla's tail smackin' things around...      

Sat, 11/20/2010 - 14:52 | 743289 gnomon
gnomon's picture

Every financial bubble pops.

China is experiencing a financial bubble while having difficulty keeping food in its pantry and fuel in its tanks.

We are living on borrowed time, (more "borrowed" than even now).

The Second Leg Down will have more than mysterious missiles ascending from the Pacific Ocean off LA.

Sun, 11/21/2010 - 14:52 | 744690 montanassky
montanassky's picture

Hong Kong women are bitcher, mainly women are mostly stupid, I like Japanese girls.

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