US housing crisis & Hong Kong 97 property bubble

People facing the housing crisis in the US might learn something from the explosion of the real estate bubble of Hong Kong in 1997-98. Although that HK bubble burst ten years ago when financial crises occurred in many Asian countries, the nature of the problems in the US seems more or less similar. The main causes are low or negative interest rate and property speculation encouraged directly or indirectly by governmental and banking policies. Here are some recollections of what happened in our HK housing market during the crisis in 10 years ago:

Property prices inflated to incredible level

Property prices in HK reached their peak a couple of months before our reunification with China in July 1997. Everyone in the market believed that unlimited capital from Mainland China would flood the real estate market of Hong Kong and prices would at least double. These victims were blinded by speculative gains and ignored the fact that prices of a small flat in the New Territories like Shatin City One had touched almost $10,000 per sq. ft. For ordinary consumers, such price level not only exceeded normal affordability but also their actual repayment abilities under the then mortgage lending rates. But still most people in Hong Kong including the banks continued to ignore the risks and encouraged all parties to continue speculating on the housing market. They invented the so-called "97 impact" of capitals coming from Mainland China. Such clever myth proved to be short-lived and ended almost at the time of the handover to China.

Mr. Market/Speculation continued to buy/speculate

Despite the collapse of the stock and property markets in the 2nd half of 1997, Mr. Market refused to face defeat. He invented a market rally in early 1998 known as the "little Spring" and lured buyers to inject their rapidly diminishing capitals into the real estate market! Yes, a lot of these innocent victims believed property prices had bottomed and the "little Spring" rally must be sustainable. Instead of saving up their shrinking capital or bullets and cutting losses, they did the opposite and injected more funds into the abyss. As a result, they were left with no capital to hold on to when prices tumbled further.

1998 Aug - Bail Out by the local HK government

If you recall, the local government of HK launched a multi-billion dollar rescue to intervene in our HK Stock market in Aug 1998. The then Financial Secretary (now the Chief Executive) of HK approved such rescue and public funds were used to purchase stocks in the market to avoid further downfall. It was certainly successful and politics dictated all of us to give support and endorsement to such intervention. Ironically, such rescue encouraged Mr. Market/Speculation to continue his bad habits as he had firm assurance that the local government must come to his rescue even when the sky must be falling. As a result, many victims purchased their flats after 1998 and fell into the "negative asset" category.

Recovery could not come

We wished that the property market could recover after cutting interest rates and artificial attempts by the local HK government to "pull up" property prices e.g. by discontinuing supply and sale of public housing, removing restrictions on property speculation, etc. But the ugly reality was that once the bubble exploded, you could never fix it! Look at what had happened to Japan after the burst of their economic bubble in the 90s and you would understand.

Our Central Government saved Mr. Market/Speculation

I may be wrong but I have no doubt. It is our motherland, our Central Government in Beijing that saved Mr. Market. Hong Kong fell into chaos after the outbreak of SARS in 2003. At that time, there were mass demonstrations everywhere in the city and Mr. Market cried out in anger. The local government almost lost control of the city and several senior officials resigned. Finally, our Central Government came to our rescue by opening up opportunities for survival to Hong Kong:

• Free-Riders from Mainland China could freely visit Hong Kong
• CEPA - Closer Economic Partnership with Mainland China granting liberal access to the Mainland market to HK businesses
• Encouragement for more Mainland investments in Hong Kong e.g. real estate

Such rescue actions are still subsisting today and without such kindness of our Central Government, I don't think Hong Kong can make it up to this day!

What would you do to rescue the housing and credit crises in the US?

Cutting interest rates will not solve the problems. It would only create inflation, a bubble after another bubble, radical devaluation of USD, support for more risky speculations in stocks and housing, etc. Why not try getting help from our Central Government in Beijing? This is what several big firms in Wall Street has been doing!