Good News for Losers

Date: Mon, 13 Jun 2011 13:27:47 +0800
Subject: Good news for losers


“We have defeated Saddam Hussein and Iraq. The good news is Iraq is ours, and the bad news is Iraq is ours.”  - David Letterman

Good news for losers like me who rent – Hong Kong residential prices have peaked. And if history be my guide, residential rents here will follow prices down. So says Keith Yeung, our head of property research, today. His reasons in brief:

1)       QE2 is ending

2)       Mortgage tightening is continuing

3)       Supply is about to jump


Unless you live in Plato’s cave you know about the first two. What is interesting is that next quarter the HK gov’t plans to auction off eight plots of land which will support 6,000 living units, double the number this quarter, or 57% of all units completed last year. We estimate developers will need to pony up HK$40 bn (US$5 bn) to participate. In fact, in the last 11 years there were only three quarters when sales proceeds exceeded this amount.

The upcoming land sale will have a significant impact on the local residential market. With the HKMA tightening on top of banks raising mortgage rates demand for the primary market is likely to be suppressed from locals (mortgage users) and mainlanders (cash buyers) both. Keith believes developers are likely to see negative cash flow next quarter and despite attractive valuations, we remain Underweight this sector. Note attached.



Global macro data continues to stink. One index that has been tracking this well is Citi’s Economic Surprise Index. A positive reading means economic data has been beating consensus. Everything was hunky dory in Q1 with the index almost touching 100 early March. Now it is -97! There is a strong visual correlation with the benchmark S&P index:


The chart seems to suggest such a dramatic plunge will result in equities mirroring some of that – which they have yet to do. Skeptics may say that charts and statistics are like whores; you can do whatever you want with them. I leave that to those with more experience.


Are recessions bad? We are conditioned to recoil like stepping on a snake when we hear the word but think about it: recessions are actually good for some people. I came across something written by Canadian economist Galbraith 20 years ago (it rained all weekend) where he points out that for quite a few segments of society a recession is actually very comfortable: those with a secure income (professors, public servants, corporate bureaucracy, lawyers, doctors, Beyonce).

Price stability is enjoyable during a recession for these people and for the retirement class that live off Social Security. The last thing they want are measures to pull out of a recession: tax reduction (leads to deficits, higher interest rates and eventually, higher taxes), cutting interest rates (hurts savers and leads to inflation) and finally, direct gov’t job creation (always a disaster). Most interestingly;


“…there is the sad fact that in a recession monetary policy DOESN’T work. The elasticity of response to reduced interest rates is then very low. People and firms spend and invest, or fail to do so, pretty much as before.”

Kind of sounds just like today.


You can get our research by typing MASR <Go> on Bloomberg.


Derek Hillen, CAIA

Mirae Asset Securities: Risk is to the Upside

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