If you've nothing nice to say on Hong Kong property, don't say anything

Does Hong Kong need a fresh conversation on its property pricing?

Hong Kong people are an open-minded lot and do not shy away from discussing sensitive issues openly.

But the property market is one exception. Everyone is involved in property to some extent and everyone is convinced the prices of flats and offices can only go up. You would not do well to suggest otherwise.

The property philosophy has served its followers well in Hong Kong. The latest bull market, which began in 2007 and has reached record levels after a brief pause in the financial crisis, is now at record levels, having bettered the prices of 1997 before the transfer of Hong Kong from Britain to China.

So the Barclays Bank analyst who had the temerity to suggest the bull in the territory's property is on its last legs and prices will probably decline by 30 per cent by the end of next year has been greeted with a chorus of protests.

But it is increasingly evident the property boom has little substance.

The latest bull market is a strange situation, coming at a time when real wages in the Hong Kong economy are stagnant and economic growth only average.

It is unlike the bull market of the 1990s, which occurred when real wages were rising and the economy, anticipating the boom in China's economy, was also flourishing.

The current bull is almost entirely driven by liquidity and due more to the US Federal Reserve than internal factors.

When the financial crisis began in 2008, the Hong Kong market fell on fears of a worldwide depression and on the expectation that the well-heeled investment bankers who rent expensive flats in the city would be retrenched.

But then Ben Bernanke, the chairman of the Fed, came to the rescue with his printing presses, releasing a rush of dollars that hit Hong Kong harder than the other Asian cities.

The Hong Kong currency has been pegged to the US dollar at HK$7.75 since the mid-1980s, so investors can spend without worrying about exchange rate risk with the greenback.

This, plus the fact that Hong Kong has probably the most liquid property market in Asia and no capital gains taxes, means the territory's property became the best place to "park" the excess liquidity the Fed was pumping into the system. So despite the financial crisis and the tepid local economy, Hong Kong property prices shot through the roof.

The local banks did their part to fuel the speculation. Despite the ample liquidity, the commercial demand for loans was not there because of the lacklustre economy.

So the banks started pushing mortgages at rates as low as 1 per cent. This is low, but still higher than the deposit rates that were almost zero, thanks to the Fed's "hot money". The international speculators and some of the locals jumped on the bandwagon, pushing up prices of "luxury flats" in Hong Kong, which in some places would qualify as large closets.

Now there are unmistakable signs the interest rate cycle is turning, with the European Central Bank raising rates for the first time since 2008, and fears are that Hong Kong prices may collapse as quickly as they went up.

Its banks have also been raising mortgage rates for the first time in three years, albeit to only about 1.5 per cent, but that is only the first in a series soon to come.

So visitors to Hong Kong are well advised not to raise the topic of a declining property market if they are interested in enjoying their stay.