Hong Kong investors buying the bubble before it bursts

They are compelled to invest in it.

According to Barclays, most investors acknowledge the bubble in the physical property market and have little faith in ever-rising prices, but at the same time are compelled to invest in it. Short positioning in the sector is at an all-time low as property stocks have largely been a liquidity story.

Here's more from Barclays:

Although investors can be sure the bubble will eventually collapse, they are uncertain as to the timing of that crash. Yet for many investors ever-shortening investment time horizons, central bank balance sheet expansions and relatively positive macro data have made it rational for them to invest, confident they can get out before the bubble bursts.

From a rational investment perspective, those investors who continue to ride the property bubble should demand greater returns to compensate for the increased risk of a price crash. We believe this requires increased liquidity inflow into equity markets to support stock prices and/or higher property prices to justify increasing share prices even with widening NAV discounts.

Yet, evident from our meetings with investors, is that the majority are largely relying on one piece of information to determine liquidity flows and/or property price increases – US interest rates. This exacerbates the risk of a crash, in our opinion; if investors are all looking at the same information then presumably they will all head for the exit at the same time, or ignore the alternative risks to a price correction.

The fact that the bubble may fall under its own weight – lack of first-time buyer affordability, rising bottom-end supply and government measures – is rarely raised, as investors largely extrapolate the recent experiences of policy failure to slow price growth. It is of course difficult to determine what ultimately precipitates a price correction but it is fair to say that the majority of investors appear to us to be both over-confident and overoptimistic, riding the bubble and hoping to get off before it bursts.