World Economy

Ghost of 1997 Crisis Haunts Hong Kong

A lot of people view the property market as almost  an extension of the stock market.A lot of people view the property market as almost  an extension of the stock market.

In 1997, the Asian financial crisis touched off a six-year property bust in Hong Kong that shaved more than two-thirds off prices and saddled the city with a stagnant economy and deflation.

As Hong Kong gets ready to celebrate the 20th anniversary of its handover to China, which happened just as Asia’s crisis began to unfold, that pain seems all but forgotten. Prices are at all-time highs. Mortgage borrowing is booming. Developers are bidding up the cost of land to records. People young and old are lining up to buy newly built apartments. In short, the kind of fervor that preceded the last bust is back, Bloomberg reported.

That’s got experts fretting about the potential fallout should the city of about 7.4 million people experience another crash. By several measures, Hong Kong looks more vulnerable this time around. On Friday, the de facto central bank announced new measures to contain risks—its second action in a week.

“When things move to the downside here, they move big time,” said Peter Churchouse, author of a financial newsletter bearing his name and a veteran analyst of Hong Kong’s property sector. “A lot of people here view the property market as almost an extension of the stock market and treat it as such.”

As central banks flooded the world economy with cheap money over the past decade, property markets in cities from Sydney to Stockholm skyrocketed. Perhaps nowhere was this more pronounced than in Hong Kong, where demand from mainland buyers contributed to the boom.

Hong Kong is particularly exposed because of a huge accumulation of household wealth in property and the fact that banking is one of the main pillars of the local economy, said Xia Le, chief economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. A property crash could drag down banks and lead to a “full-fledged financial crisis,” Xia said.

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