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Economics Property Bubbles And Inflation Issue In Hong Kong

4148 words - 17 pages

TABLE OF CONTENTS

1. INTRODUCTION ……………………………………………………………………………. 4

2. PROPERTY BUBBLES IN HONG KONG ………………………………….…………….. 5

INFLATION AND INFLATION RATE IN HONG KONG ……………………………….. 10

3. CONCLUSION…………………………………………………………………………18

4. REFERENCES ……………………………………………………………………………..19

5. APPENDICIES …………………………………………………………………………..... 20

Appendix 1 ………………………………………………………………………………… 20

Appendix 2 ………………………………………………………………………………… 21

Appendix 3 ………………………………………………………………………………… 22

Appendix 4 …………………………………………………………………………………23

Appendix 5 ………………………………………………………………………………… 24

Appendix 6 ………………………………………………………………………………… ...view middle of the document...

Based on the figures released by the Centa-City Leading Index, house prices have risen over 50% since the start of 2009 to 2011 (Fig.1 and Appendix 2). In Year 2012, the CCL index reached 101.17 that have already surpassed the record levels set in 1997. The prices have risen beyond of the reach of average family and concerns are growing that a property bubble would have dire consequences on the banking sector and overall economies of Hong Kong.
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Fig.1 Centa-City Leading Index

Housing Demand in Hong Kong

There are many factors boost the demand on residential property. In 2009, the Hong Kong economy has emerged from the global financial crisis. GDP grew in all four quarters in 2010 and expanded by 6.8%. Job market also improved with very low unemployment rate. Furthermore, the majority of people in China keep optimistic about the prospects of Hong Kong property market by flowing in capital especially the luxury segment becomes high price discrimination. Since Hong Kong dollar is pegged with US dollar, the quantitative easing in the United States made the banking sector in Hong Kong is flooded with liquidity, thus banks are able to offer mortgages at record low interest rates below 1%. In addition, the rental yields were generally higher than the cost of borrowing and the growing inflation rate made property purchase became more attractive to investors. As a result, the property market remained bullish throughout 2010.

Housing Supply Situation in Hong Kong

Supply Shortage is often quoted as the cause of high home prices in Hong Kong. According to the basic rule of demand and supply, if demand is more than supply, price will increase. In the housing market, supply is slow in responding to changes in demand. The supply of housing services would only change slowly even faced with drastic changes in price. Therefore, housing supply is so price inelastic.
In Hong Kong, the land system is inherited from the colonial government. Sale of government-owned land is by way of leasehold grants, through publicly held auctions or tenders. Public land auctions are conducted according to the pre-set programs and annual land sale programs are made public every year. At the auction, the lot goes to the bidder who offers the highest price. Since 2002, the government had tightened the supply of new land for housing purposes, and housing completions have been falling. The tight supply of new land has contributed to the steep property price rises in recent years.
Furthermore, as Hong Kong dollar is pegged with US dollar, the depreciation on Hong Kong dollars drives the costs of construction materials import from mainland China are increasing, it leads the total marginal cost becomes much higher and push the price up since P>MC.

Government Policy in Hong Kong

Property bubble will have huge impact on regional economics and it is the biggest risk to the economy recovery. The government has to implement additional measures to cool property...

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