from WSJ
"HONG KONG (Dow Jones)--The International Monetary Fund warned Thursday it sees increasing risks of a property bubble in Hong Kong amid continued liquidity inflows and rock-bottom interest rates coupled with tight housing supply, urging the city's government to take further measures to rein in the booming real estate market if the asset-price inflation continues.
The IMF said in its annual review of the Hong Kong economy that while the city has returned to robust growth, it sees rising inflationary pressures fueled in large part by soaring property prices and a stronger Chinese yuan.
"These pricing pressures will become increasingly visible in the coming months with inflation expected to reach around 5% by end-2011," the IMF said in its review under the Article IV consultations.
The organization said it expects Hong Kong's gross domestic product to expand 6.75% this year, with the growth moderating to 5% to 5.5% in 2011.
The IMF said that Hong Kong's fixed exchange rate system with the U.S. dollar creates challenges going forward in preventing inflation and property price bubbles. The exchange rate means Hong Kong essentially imports the currently very low interest rates set by the U.S. Federal Reserve.
"Hong Kong has monetary policy determined by the U.S. in an economy growing much faster than the U.S.," said Nigel Chalk, a senior advisor of the IMF.
Chalk said a main area of concern to the IMF is the rapid increase in property prices in Hong Kong. For now, however, the IMF feels prices don't reflect "misalignment or disequilibrium." Tight land supply, low interest rates, rising incomes and rising rents all justify the increase in housing prices, he said.
The concern is that should property prices continue to accelerate at roughly 20% a year, as they have the past two years, it could create a disruptive scenario when the economy slows.
"Our concern isn't now, it's a prospective concern," said Chalk. The use of so-called Hibor mortgages, in which the interest rate floats according to the benchmark Hong Kong interbank offered rates, puts added risk on homeowners in a downturn. A slowing economy in Hong Kong and China, combined with a healthy economy in the U.S., would mean falling home prices with rising interest rates.
"You could end up where the property market starts to deflate, prices going down, but payments on household mortgages are going up. It becomes harder to pay your mortgage on an asset that has less value," Chalk said.
The IMF said measures taken by the Hong Kong government to safeguard financial stability amid the property price inflation is essential and should continue. It said the government should consider adopting more measures, such as further increasing transaction levies on property sales, should prices continue to soar"
I wrote a blog post (on my old blog, please click here) about the pre 2007 inflation spike that lead to the 2008 market collapse. Mentioning the Chinese inflation problem
Aspects (from above link) of the China inflation story (pre/post 2007) came from the Bank of International settlements article appearing in the Telegraph June 2007
"The BIS said China may have repeated the disastrous errors made by Japan in the 1980s when Tokyo let rip with excess liquidity.
The Chinese economy seems to be demonstrating very similar, disquieting symptoms," it said, citing ballooning credit, an asset boom, and "massive investments" in heavy industry.
Some 40pc of China's state-owned enterprises are loss-making, exposing the banking system to likely stress in a downturn.
It said China's growth was "unstable, unbalance, uncoordinated and unsustainable", borrowing a line from Chinese premier Wen Jiabao"
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