While the US housing market is busting, the Hong Kong housing market half a world away is booming. Two luxury apartments went on the market in late 2009 for $38.7 million each. At $9,677 per square foot, they are the most expensive apartments in the world. Apartment prices in the Hong Kong mass market have also gone up by double digits from 10% to 14% a year. The urban property price to household income ratio jumped from 8.5 times to over 10 times over a period of 6 months in 2009.

Paradoxically, Hong Kong’s housing boom is caused by the US housing bust. Because the Hong Kong dollar is pegged to the US dollar, the almost zero% US short-term interest rate intended to boost the US economy has also forced the Hong Kong short-term interest rate to fall in step.* Although mortgage rates are long-term rates, the very low short-term rates nevertheless helped pull down the mortgage rates. A typical Hong Kong mortgage interest in early 2008 was only 3.1%.

With inflation running at 3.1% per year, the real mortgage rate was actually negative. In fact, the monthly mortgage notes were lower than the monthly rent of apartments. Thus apartments were a good inflation hedge. The Chinese government’s attempt to stimulate its recessing economy provided further credit fuel for Chinese speculative buyers to buy up Hong Kong apartments. Indeed, half of the buyers of luxury apartments in Hong Kong in late 2009 were reportedly mainland Chinese. US private-equity funds are also looking for a quick buck speculating in the property market using cheap US dollars without fear of any currency exchange risk.

The housing boom in Hong Kong does not mean the Hong Kong economy has escaped the global recession. The unemployment rate remains high (5.4%) by Hong Kong standard and retail sales dropped 5.5% year-on-year in July 2009.