The reason I cite this study is that, I can’t help but to notice similarities between the results of the study and what is happening here in Hong Kong.
Although the problem of inequality is very well reported in Hong Kong with increasing Gini Index, good data are hard to come by. But casual observation can point to similar conclusion. Because of the overly loose monetary policy in the United States (and for that matter, China), Hong Kong property prices have gone through the roof.
When Hong Kong people go and buy home, the ones get most leverage are not those who buy the most expensive properties, but the cheapest ones. And for that matter, the Hong Kong Monetary Authority has limited the maximum loan-to-value ratio for transaction above HK$12mn to 50%, and HK$8-12mn down to 60%, while the requirements for cheaper residential properties remained unchanged at 70% (although with a little help from Hong Kong Mortgage Corporation, borrowers can borrow more than 70%).
We are hearing increasing complaints here that lower to middle classes families in Hong Kong are finding it increasingly hard to buy affordable homes. To buy homes, this group of people will undoubtedly have to borrow more than the top earners. But just as I pointed out in my Hong Kong Property forecast for 2011, the risk-reward balance for Hong Kong real estate market has become pretty unattractive now. If the property market does correct, those families who are the most vulnerable will be the lower to middle classes as they have the highest leverage.
Undoubtedly, this should make people, especially the government, worried. The government should also have the painful lesson of the post-1997 crash, when the government introduced the Home Starter Loan Scheme in 1998 which helped first-time home owner to obtain credits from the government. As the market corrected for 6 years, the scheme produced massive bad loans on government’s own loan book. If these loans were provided by commercial banks, this would surely made credits tight, if not downright financial crisis.
Now, of course, the government will not do this again. But as banks are flooded with liquidity after the loose monetary policy in the United States, it is now extremely easy to obtain credits from banks at unsustainably low rates. We can only hope that there will not be big crisis in Hong Kong, after years of increasing inequality.