HK Housing Price Trend is Accurately Forecasted 18-month Ago

Besides forecasting the Hong Kong economic growth rate in Feb 2018, I have also made a prediction of the downturn of housing price in Hong Kong due to capital outflows. After 18-month, the prediction is revealed to be accurate.

The original text of the prediction (original in Chinese as shown in Figure 1) is translated as follows:

“In 2018, Hong Kong’s real interest rate rebounded and is wandering between the positive and negative zone. If interest rates continue to rise, and inflation falls, real interest rates turn positive, hot money will flow out, affecting the prices of various assets, including property prices. “[1]

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Figure 1 The big prediction of the Year of the Dog. Source: [1]

In 2018, the United States raised interest rates several times, and the Hong Kong Monetary Authority followed, but the banks raised the best lending rate only once. The inflation rate was relatively stable, and thus the real interest rate changed slowly. However, the trend of positive real interest rate remains the same. Although it takes a bit longer time, the forecast has finally come true!

In fact, Figure 2 shows that from July 2018, the annual growth rate of housing prices has gradually slowed down from the recent highest 17% to a negative growth rate (-0.1%) in July this year. The trend of declining growth rate is accurately predicted.

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Figure 2 Annual rate of change in property prices in Hong Kong. Source: Rating and Valuation Department’s Housing Price Index

It is easy to estimate up or down, but it is difficult to verify the cause because the probability of rising or falling is 50% even if it is random, but the association of a verifiable explanation and its outcomes cannot be found merely by luck. In my last year’s forecast, I made it clear that it is the problem of capital outflow that has caused property prices to fall. The following four figures show the trends of outflow of funds in Hong Kong from several different aspects. You may wish to conduct quantitative analyses to verify the relationship between the two.

Figure 3 is the exchange rate chart of the US dollar against the Hong Kong dollar. Since the US has raised interest rates nine times in the past few years, and the Hong Kong banking industry has not followed (except once), the hot money has flown away, and the Hong Kong dollar exchange rate has weakened. It has hit the 7.85 level of the weak exchange guarantee many times since then, the exchange rate is still at the low level of 7.84 at the time of this writing, investors are also betting that the weak side of the Hong Kong dollar exchange rate guarantees would change soon [3].

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Figure 3 USD/HKD exchange rate. Source: HKMA Semi-annual Financial Report [2]

A more direct measurement of the flow of funds, you can refer to Figure 4 below for changes in the Bank’s Aggregate Balance and Exchange Funds Bills and Notes. Since the Global Financial Turmoil in 2008, more than a trillion of Hong Kong dollars hot money has flowed into Hong Kong, but since April-August 2018 (that is, about one month after the publication of my forecast article [1]), there have been HK$103.5 billion outflows. Furthermore, in March 2019, another HK$22.1 billion left, leaving only about HK$100 billion in the Aggregate Balance. The HK interbank offer rate (HIBOR) has thus been gradually climbing up during the period.

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Figure 4 Hong Kong Bank Summary and Foreign Exchange Bonds, Source: [2]

Figure 5 shows that since 2014, RMB deposits in Hong Kong have started to fall from a high level, falling from nearly 1.2 trillion yuan to 600 billion yuan in July this year, a drop of nearly half. Among them, the decline in corporate deposits was the most serious, changing the trend of increasing RMB deposits in Hong Kong since the second half of 2010.

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Figure 5 The amount of RMB in Hong Kong. Source: [2]

Finally, the stock market has also experienced net capital outflows. Since April this year, it has been negative for four consecutive months, reflecting the continuous net outflow of funds from the stock market (Figure 6). The magnitude is not light, especially in April this year. The outflow reached US$2 billion, and the net outflow of funds for the next three months continued to exceed US$500 million per month. The current trend of net outflow of funds began in June 2018 (that is, about four months after my forecast article was issued), and the forecast was made when the net inflow of funds was peaked: the net inflow of funds in January 2018 exceeded US$1.7 billion.

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Figure 5 Hong Kong’s funds from the stock market. Source: [2]

Whenever property prices fall, investors and analysts always blame a current black swan event, which may be in line with human nature, but it is easy to ignore the real reason behind. In fact, the above-mentioned capital flow and the slowdown in property price growth have a strong and clear trend rather than an abrupt incident. It is not simply a black swan incident.

On the contrary, the trend of capital outflow can always trigger black swan incidents. For example, when foreign speculations on property prices are welcomed, then it could result in crazy soaring of housing prices which sometimes can be far beyond the affordability of the local households. It would make public grievances, and when the disparity between the rich and the poor is growing, the dissatisfaction of the government’s governance would be accumulated. If the political system lacks a democratic component to restrict the government, especially on the collusion between government officials and businessmen, then social unrest can normally be expected.

[A Chinese Version is available at 姚松炎 (2019) 你居然準確預測香港樓價走勢,方格子,9月28日。]


[1] 姚松炎文宣團隊 (2018) 你居然未睇樓年運程 (單張封面),2月9日。
[2] HKMA (2019) Half-year Monetary and Financial Stability Report, Sep.
[3] 姚松炎 (2019) 投資者賭注港元匯率弱方保證變化,方格子,8月16日。://

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ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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