Hong Kong at risk of property price correction: IMF

Hong Kong is at risk of an abrupt decline in property prices after gains fuelled by low interest rates and a limited supply of new housing, the International Monetary Fund (IMF) said.

“The property sector is the main source of domestic economic risk,” the IMF said in a report on the city released today.

The odds of a slump that has major economic and financial consequences is “fairly low in the near term”, the fund said. The city should mantain its currency peg, it said.

Home prices in Hong Kong, the world’s most expensive place to buy an apartment and to lease commercial space, have doubled in the past four years, leading the government to tighten mortgage lending and increase land supply.

The property sector represents half of outstanding loans for use in Hong Kong, with additional risks from the use of real estate as collateral, the report said.

The city’s economic growth may rebound to about 3 per cent next year, up from an estimated 1.25 per cent this year, the IMF said.

Inflation may average 3.75 per cent this year and 3.5 per cent next year.

Housing prices have increased 20 per cent this year, “defying the general slowdown in economic activity”, the report said.

Concerns about the affordability and supply of housing “will take time to address”, Mr Steven Barnett, the fund’s Hong Kong mission chief, said in a Bloomberg Television interview from Washington. While measures such as stamp duties may have a short-term effect, “in the long run, it’s really about increasing supply”, he said.

The Hong Kong-US dollar peg is still the “best arrangement” for the special administrative region and “warrants continued support,” Mr Barnett added, calling the system “transparent and credible”.

Hong Kong linked its exchange rate to the US dollar in 1983 when negotiations between China and the UK over the city’s return to Chinese rule spurred capital outflows.

The exchange-rate system ties the city’s monetary policy to that of the US, where the Federal Reserve is using near-zero interest rates to help the economy recover from a recession.

“Hong Kong really has the preconditions to maintain the system,” Mr Barnett said. “It has flexible markets, robust and proactive financial oversight, and a very healthy fiscal position.”

Source : Today – 12 Dec 2012

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