Hong Kong property prices to anchor inflation expectations

The CPI for August is scheduled for release this week. Inflation as measured by the CPI is expected to advance 6.1%YoY, down from 7.9% in July. Food prices in Hong Kong, however, are still rising in August as Hong Kong’s food is primarily imported from China. Indeed, the food component of China’s CPI has continued to advance by 13.4% YoY and 0.6% MoM in August.

In Hong Kong, property prices are the primary anchor of inflation expectations. Negative sentiment has clouded the property market recently after major commercial banks started raising mortgage rates (e.g., some banks charge mortgage rate as high as HIBOR plus 2.85%) along with disappointing land auction results. In July, residential property prices fell 1.7% MoM for the first time since Dec 10. More blips are expected in 2H11 but sharp consolidations are unlikely given heavy economic fundamentals as evidenced by a tight labor market. Unemployment rate for the 3 months-ended August fell to a 13-year low of 3.2%.

However, sharp surges of private rents have yet to filter through into the CPI. Private residential rents averaged HKD 20.3/sqft in July, up from HKD 20.1/sqft in June, almost matching the highest record of HKD 20.4/sqft ever made in Sept 97. Push-pull impact from the surging rental component will continue in the near term.

Generally speaking, the fact that Hong Kong continues to import loose monetary policy from abroad, coupled with medium term weakness in the USD means imported inflationary pressure will remain in 3Q11.