The Property Market at World Level - Report Example

Introduction The recent credit crunch has resulted into severe economic consequences for most of the developed world. What actually is credit crunch is an interesting topic because there is generally a lack of consensus on the accurate definition of credit crunch. According to Bernanke and Lown, Credit Crunch is “decline in the supply of credit that is abnormally large for a given stage of the business cycle” (Bernanke & Lown, 1991). According to this definition, credit crunch is related with the business cycles and the overall decline in the supply of credit to either private as well as public sector. This topic is interesting in the sense that it is mostly considered as the key reason behind the decline in the economic growth of the world as well as the collapse of the world’s financial system. Thus the impact of this is far reaching and can provide insight into the future of Hong Kong’s property market as well as its overall financial infrastructure and how they can be affected. The reason for choosing this topic is therefore to study as to how this credit crunch will affect the world markets in general as well as Hong Kong Market in particular. Credit Crunch & Property Markets Current credit crunch is largely perceived as the main reason behind the collapse of the property market in international system. The reason as to why credit crunch resulted into the collapse of the property market can be traced back to the subprime mortgage crises which emerged due to the imprudent lending practices of the bank. By definition, a subprime borrower is a borrower whose credit has not been entirely satisfactory due to historical defaults on payments against loans taken. (Budworth,2009). However, such borrowers offer more lucrative options for the banks and financial institutions to lend because of their higher risk. High risk borrowers are often charged high rates therefore there is always a chance to earn high on such relationships. Based on this simple principle of risk and return banks and financial institutions started to lend to their subprime borrowers especially in mortgage markets. However, banks and other financial institutions, at the same time, also started the process of securitization through which the mortgage portfolio held as security with the bank were bundled and securities were sold out against such collaterals in the open market. The basic purpose was to recoup the liquidity lost in making the loans to subprime borrowers. Crises in property markets started to emerge when subprime borrowers started to default on their commitments and as such banks have to pay out to the holders of mortgage backed securities through other means as with the default of the borrowers a mismatch in cash flows were created. The crises also aggravated because of the fact that due to liquidity drain, banks were unable to lend to other sectors therefore there was a general credit crunch.(Pritchard,2007). Since subprime borrowers failed to pay their dues therefore banks have to repossess the properties held under the security which increased the overall supply in the market and banks have to resell them under distress condition thus the overall property market also collapsed. Credit Crunch and Hong Kong Hong Kong is a very vibrant economy and is well connected with the rest of the world as it serves as the hub for developed world to get access into far eastern markets including China. It is because of this reason that it is important to understand and study the impact of current credit crunch on Hong Kong and its property market. Numerous studies and newspaper articles indicated that the Hong Kong is also one of the latest casualties of the credit crunch and its fast spreading from the financial sector of the country to its real economic sector. (Benson,2008). There have been constant bankruptcies of the few of the largest organizations of Hong Kong including its retail giant U-Right indicating that the financial crises are fast approaching the real economic sector of the country also.(Stephens,2008). Evidence also indicate that the credit crunch is also impacting the property market of the region also as the financial institutions are relatively finding it difficult to lend to other sectors of the economy. It was forecasted in 2008 that the prices in the Hong Kong property market will go down by at least 20 to 30% over the period of next year. However, there are fears that these crises in the property market could be worse than the crises that were witnessed by the country during 1996/97. Reports further indicate that the overall supply of the new housing units in decreasing day by day and this decrease in supply would further create crises in the property market. Reports further indicate that the pricing of the luxury housing units in Hong Kong is relatively decreasing too thus putting more pressure on that segment of the property market which was relatively more inelastic to the changes in the demand patterns.1 Most of the working population of Hong Kong comprises of the expats who were also instrumental in at least keeping the consumption level at a point where there were no such threat to the economy. However, with increasing volatility in the foreign markets, volatile energy prices is causing a decrease in the overall consumer spending which is in return suppressing the overall demand for the new housing units in the market. It is however, estimated that the overall demand for the offices at least in terms of rent will remain constant due to various reasons. Many analysts believe that the growing influence of China in the Region as well as on the world economy however, will make Hong Kong one of the most preferred hubs in the Region. With increase in Chinese tourism as well as inflow of international visitors in the country, the overall demand for the housing units will remain stagnant at least in the short run. Chinese tourism is therefore considered as one of the most important economic factors which can result into the recovery of the housing market in the Region. It is therefore argued that the impact of the credit crunch may not be entirely severe on the Hong Kong market as there are already signs of recovery in the market. The retail as well as industrial property markets are picking up due to the hope that international events will further speed up the consumer spending in the Region hence the overall demand patterns will start to pick up and property market will recover based on this hope. It is also important to understand that there is now a great emphasis on the role of government in regulating the market and take more proactive role in saving not only the financial sector of the region but also its real sector too. It is also argued that the banks have learned a lot from the previous bank failures in the region and are relatively more cautious in their overall approach and policies in terms of extending the credit. The history is therefore serving as a strong deterrent for the financial as well as property market of the region from complete collapse. A strong financial and banking system therefore may serve as an important factor for Hong Kong to save itself from the complete collapse. Personal Views The reasons behind the credit crunch are multiple in nature as it is not only the failure of the financial institutions to carefully self regulate themselves but also it is the failure of the regulatory agencies which could not control the increasing appetite of the financial institutions and allowed them to lend into areas which were relatively more risky with the possibility of creating contagion affect on the other sectors of the economy. Hong Kong market has matured to a point where it may be relatively in better position to withstand the current financial crises. Personally I believe that China will be the deciding factor in stabilizing the Hong Kong Property market because Hong Kong still serves as a hub for most of the activities that are taking place in the country. There is also a constant increase of Chinese tourists in the Region because of the increasing purchasing power of the Chinese consumers. An increase in this purchasing power will therefore keep the Hong Kong Economy running and more liquid in nature. Though it may be important to consider that the Hong Kong is a part of the larger global economy and financial crises are definitely hurting its economy however, due to its overall status and nature, Hong Kong will remain largely insulated from the external shocks. This is because of the increased experience and capacity of the banks in Hong Kong to restrain them from lending into areas which were risky as well as lend into relatively more liquid and secure investments. It is also still not clear to know the overall extent of the subprime lending made by the Hong Kong however, considering its small size, overall subprime lending may be a very small portion of the total lending made by the financial institutions. References 1. Benson, M (2008) Is the Hong Kong property market set for a serious decline? Propertycommunity.com, Available: http://www.propertycommunity.com/emerging-property-markets/109-is-the-hong-kong-property-market-set-for-a-serious-decline.html Last accessed 23rd November, 2009 2. Budworth, D (2009) The credit crunch explained Times Online, Available: http://www.timesonline.co.uk/tol/money/reader_guides/article4530072.ece Last accessed 24th November, 2009 3. Clair, R. T., & Tucker, P. (1993.). Six Causes of the Credit Crunch. FED Dallas. Retrieved November 22, 2009, from www.dallasfed.org/research/er/1993/er9303a.pdf 4. Pritchard, A (2007) Credit crunch alert over UK economy The Telegraph, Available: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/2820546/Credit-crunch-alert-over-UK-economy.html Last accessed 24th November, 2009 5. Stephen, C (2008) Credit-crunch casualties hit Hong Kong sentiment Market Watch, Available: http://www.marketwatch.com/story/new-credit-crunch-casualties-hit-hong-kong-sentiment Last accessed 24th November, 2009 Read More