Well-known Hong Kong investor and money manager Puru Saxena joins the Financial Sense Newshour and explains how one of history’s largest housing bubbles is at the mercy of the Fed.
Before selling all his commercial and residential properties in Asia, Saxena tells listeners that prices were running around $3000 a square foot in his office building, with far higher prices for more expensive and higher demand areas of the market in Hong Kong.
As recent as 18 months ago, properties overlooking the harbor were in an “absolutely absurd bubble” selling for $8000 to $9000 a square foot.
One major problem, Puru says, is that investors there have taken on more mortgage debt in the last four or five years than they have “in the entire history of Hong Kong,” and all at variable rates. There are no fixed rate mortgages in China or Hong Kong and so, according to a study by the monetary authorities, if interest rates go up by just 2%, the average monthly payment for a 30-year variable mortgage will increase by almost 30% per month. When 80% of pre-tax income is already being spent to pay for mortgages, he says, “you don’t have to be a genius to figure out that this is not sustainable.”
Puru reminds the audience that monetary policy in Hong Kong is pegged to the U.S. So, this massive bubble in property prices, he says, has been inflated largely by zero interest rates set by the U.S. Fed to stimulate growth domestically. Once the Fed starts raising interest rates, Puru expects the fallout to be “much worse” than what happened in the U.S:
“It’s going to be much worse, much worse…the excesses in America were not nearly as bad as the excesses in China. China is even worse Jim. I’m talking about Hong Kong here. If you look at China, if you look at the value of all the residential stock of real estate in China, it is almost 400% of GDP. It has now surpassed the same excesses we saw in Japan in 1989-1990.”
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