Enzio's Clock

Background

1. Why property bubbles happen

We are not property experts, but having bought and sold some over the course of our lives, we - like you - have gleaned some experience in this fascinating area.

First, back to what the the Economic Clock® reveals about property cycles.  Property is an asset.  So it is bought when there is an excess supply of money around. Currently, however, we have no such excess supply of money: when viewed from the credit angle, there is an excess demand for money. Banks are not lending, as we know.  So a "property bubble" cannot occur when there is an excess demand for money - when banks won't lend.

Obviously, then, bubbles occur when banks do lend. This is what the Americans are finding out the hard way. Until Lehmans hit, credit was easy to come by, so a bubble was created.

 

2. Why they won't happen here

We get back to the compass provided by the Economic Clock: banks are not  lending in Hong Kong, and certainly are not lending to the property sector.  

On top of this, when you do want to buy a property in Hong Kong, you have to deposit 30% minimum, meaning that the bank will lend you only 70% of what it - the bank - values the property at.  With Hong Kong's banks being so conservative, their valuations normally lie about 30% below the current market valuation, meaning that the buyer ultimately has to fork-out more than 30% if he/she wants to buy a residential property.

Next to banks' conservative stances, the other reason why we are not seeing a property bubble here is because the property market is being fueled by "suitcase money" that is exiting the mainland.  This is typical for China: when people make money, they seek to get it out of the mainland as fast as possible. The reason is that they fear another clampdown, so they would prefer to get the money out quickly.  "Better safe than sorry" is the overriding dictum of such capital flight jockeys.  Understandably so.

And it is this "suitcase money" that "explains" our skyrocketing residential and commercial property prices.  So we are pretty safe.

3. Crash scenarios, re-visited

 Since 7th July we have provided you with around five reasons to expect a market crash.  More recently, we mulled the dangers of earnings exceeding revenues, and yet again warned that this might provide incendiary crash material.

In a nutshell, here are reasons for a crash:

• the earnings outlook dims, because revenues just won't increase when, in the jargon of our Economic Clock, there is an "excess supply of goods";
• the Economic Time® is going to stay stuck in an excess demand for money/excess supply of goods at least until 2011;
• there may be a crash outside of the US, one that triggers a global crash. We have seen such occurrences before, with crashes emanating from Russia and Mexico...maybe China will be the "fall guy" this time?;
• bonds take a dive and that ricochets into the stock market;
• props desks decide that there is not more market upside, so they do "analysts huddles" and surreptitiously put short positions on before they tell clients...

So yes, you could see Hong Kong's stock and thus property market take a short dive. But with all of this "suitcase money" from China gracing our shores, any short-term dive in property prices must be seen as an opportunity to buy - not sell - property. 

How to Make Money Off This Idea

1. Always consult your financial adviser first.
2. When the Hong Kong property market does dive because of a stock market crash, then buy into the major counters of property developers here (Sun Hung Kai Properties, Cheung Kong and Henderson Land spring readily to mind). These are large cap stocks that any institutional money will have to buy, should they enter our market.