Escalating property prices, the curse of Hong Kong, have been conveniently blamed on short supply, which, in turn, is widely attributed to the scarcity of land.

That is an overly simplistic explanation for a problem that has fueled growing discontent among the majority of Hong Kong people. Scarcity of development land has always been an issue in hilly Hong Kong. As in most major cities, there is never enough supply to satisfy the demand of an increasingly affluent population.

But the exceptional rate of increases in property prices in the past couple of years was the result of unusual economic circumstances. Property tycoon Li Ka-shing, one of Asia's richest men, has said that it was reasonable to expect property prices in Hong Kong to increase by an average of about 10 percent a year. But the average housing prices have more than doubled in the past two years.

Obviously, the "normal" market force of supply and demand was grossly distorted by other factors beyond the control of Hong Kong. Since the outbreak of the global financial crisis in 2008, the United States has pursued an "abnormal" monetary policy of credit expansion to stimulate economic growth. This has resulted in near-zero interest rates and a persistent depreciation of the US dollar against most other major world currencies.

Hong Kong dollar exchange and interest rates have been moving in tandem with those of the US currency because of the linked exchange rate system. The plentiful supply of credit at unusually low costs has fuelled a property bonanza that apparently caught the government by surprise.

As the economy in the US is showing signs of recovery, its expansive monetary policy is coming to an end. The US Federal Reserve has indicated more than once that there is a distinct possibility of raising interest rates within 2015. Some economic analysts predicted that interest rates will be raised more than once before the end of the year.

Already, the US dollar has been strengthening against the euro, Japanese yen and other major currencies. The rise of the US dollar exchange rate was further exacerbated by credit expansion monetary policies pursued by the European Union and Japan to spur economic growth and reverse deflationary trends.

In Hong Kong, the government is preoccupied with fighting escalating property prices by seeking to aggressively increase supply in coming years. But property prices could fall even before the first batch of apartments in the government's ambitious program are built.

Concerns about the effect of raising interest rates to "normal" levels have already sent the Hong Kong stock market into a tailspin in recent weeks. Unsurprisingly, bank and property stocks have taken a beating in the bear run.

An increase in interest rates would discourage many prospective home buyers at a time when the monthly mortgage loan repayment already accounts for more than 50 percent of an average household's expenditure. By then, market forces would have achieved the goal that has so far eluded the government.

(HK Edition 07/28/2015 page6)