Don't be fooled by cheaper Hong Kong home prices: analysts

Prices may be nearing a crossroad.

It has been noted that Hong Kong home prices have historically been inversely correlated to the strength of the USD.

According to a research note from Barclays, further, given the currency peg to the USD and Hong Kong's open economy, a weak/strong USD makes Hong Kong's assets and services appear cheap/expensive relative to its neighbours.

What is interesting is that this relationship has broken down since 2010, said Barclays.

While quantitative easing may have played a part, another possible explanation was the appreciation of the Rmb which has made Hong Kong assets seem cheaper than its Chinese neighbours.

Barclays said that considering the continued strength of the DXY and the recent depreciation of the Rmb, it believes Hong Kong home prices may be approaching a crossroad and the historical inverse relationship between the DXY and local asset prices may re-assert itself.

Here's more from Barclays:

Will some of the old relationships re-assert themselves? In our recent report Are we there yet? on 30 January 2015, we highlighted several traditional property market dynamics that seem to have broken down in recent years.

One such relationship was the link between local asset prices and the relative strength of the USD. Given Hong Kong's open economy and its currency peg to the USD, a strong USD makes our goods and services appear more expensive. Conversely, a weak USD makes local assets and services appear more attractive.

Food for thought: Hong Kong home prices Vs. DXY Vs. Rmb: While the dynamic between Hong Kong home prices and USD strength has broadly held in the past, this relationship has broken down since 2010. Although monetary easing may have played a part, another possible explanation may be the appreciation of the Rmb over the same period.

If one were to look at the chart of Hong Kong home prices versus the Rmb-HKD, the link appears to pick up where the USD-dynamic has broken down. The question we pose now is – what happens if the USD continues to strengthen just as the Rmb weakens? Will the past dynamic between the USD and Hong Kong home prices re-assert itself?

Prefer higher dividend yield stocks for defensiveness: Among the Hong Kong property stocks, we continue to advocate using dividend yields as a valuation cross check. Among each of the developers, landlords and REIT categories, we believe the higher dividend yield stocks should prove more defensive.