HK worries Fed move will overheat property

[September 14, 2012]  HONG KONG (AP) -- The Fed's latest plan to spend billions on securities and keep interest rates near zero is being hailed by investors desperate for economic salvation. But in Hong Kong it is causing headaches for officials worried about a frothy property market.

Officials in the southern Chinese financial center said on Friday they were concerned about the local housing market overheating following the Federal Reserve's new moves to revive the U.S. economy.

Because Hong Kong's currency is pegged to the U.S. dollar, officials can't raise interest rates to cool the property market. Instead, they must follow U.S. monetary policy.

Officials announced tighter requirements on mortgage borrowers aimed at cooling the property market and protecting the banking sector.

Hong Kong house prices have nearly doubled since the start of 2009, according to a widely watched index compiled by realtor Centaline. The city is one of the world's least affordable places to live. Prices have risen because of low interest rates, easy credit, an influx of money from mainland China and limited supply of new housing.

"We expect that the period of exceptionally low interest rates and abundant global liquidity will stay with us longer and the risk of overheating in the property market in Hong Kong will increase," said Norman Chan, chief executive of the Hong Kong Monetary Authority. The authority is the central bank of the semiautonomous Chinese region, which has its own financial and legal system separate from mainland China.

Financial Secretary John Tsang was even blunter.

The third round of so-called quantitative easing, which involves an open-ended plan by the Fed to buy $40 billion worth of mortgage bonds a month, "may lead the market to expect that property prices would rise further," he said.

"This deviates from economic fundamentals and substantially increases the risk of a bubble forming," Tsang said.

The monetary authority will require banks to tighten up requirements for applicants taking out a second mortgage or whose income comes mainly from outside of Hong Kong. It will also cap new loans at 30 years after growing concern that loan periods were getting longer, with some up to 40 years.

High property prices are a growing source of frustration for the city's residents, many of whom can only afford to live in tiny apartments. Hong Kong's new leader, Chief Executive Leung Chun-ying, has announced measures to raise the supply of units but they've had little effect on prices so far.

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Online: http://www.hkma.gov.hk/ 

[Associated Press; By KELVIN CHAN]

Follow Kelvin Chan at http://twitter.com/chanman.

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