The Straits Times | Mar 23, 2013
Banks start raising mortgage rates in response to tighter risk rules
HONG KONG - Hong Kong officials, who have struggled in vain for three years to slow the growth in home prices, are about to get their wish as the city's biggest banks raise their mortgage rates.
Prices could fall as much as 20 per cent over the next two years, according to Deutsche Bank, after lenders including HSBC Holdings and Standard Chartered (Stanchart) raise their home loan rates by 25 basis points in response to tighter risk rules.
Low mortgage costs and a property buying spree driven by mainland Chinese have seen home prices shrug off repeated attempts by the government since 2010 to stymie escalating housing values amid an outcry over affordability.
HSBC was the first among Hong Kong's lenders to lift rates from March 14. Its mortgages linked to the best lending rate climbed to a range of 2.85 per cent to 3.15 per cent, while at Stanchart, they are from 3.1 per cent to 3.5 per cent.
"Banks were mispricing their retail mortgage loans," Mr Sebastian Paredes, chief executive for Hong Kong at DBS Group Holdings, said. "Now, with the new measures from (Hong Kong Monetary Authority), they will be forced to correct it."
The rate increases may finally put a dent in prices, which have climbed 16 per cent since Chief Executive Leung Chun-ying was sworn in on July 1.
"With the new government measures, the potential further rises in mortgage rates, and the expected increases in new supply in the medium term, we expect property prices to show larger corrections," Mr Tony Tsang and Mr Jason Ching, analysts at Deutsche Bank, wrote in a March 13 report.
A 646 sq ft apartment in Hong Kong costs about HK$7.5 million (S$1.2 million). In Manhattan, New York, a flat of the same size costs US$700,264 (S$875,400).
Since 2010, Hong Kong has imposed an extra tax of up to 20 per cent of the value of homes on buyers who sell them within three years of purchase, and raised the minimum down-payment requirement on mortgages for homes valued at more than HK$7 million.
Mr Leung, last October, imposed an extra 15 per cent tax on all home purchases by companies and non-permanent residents.
While the impact on prices has yet to be seen, the measures have reduced the number of transactions. The average number of homes changing hands every month fell to 6,777 last year from 7,039 in 2011, and 11,315 in 2010.
Developers are responding. Cheung Kong Holdings, the builder controlled by Mr Li Ka-Shing, the city's richest man, cut prices at one of its projects by 11 per cent this month, while Sun Hung Kai Properties, the city's biggest builder by value, cut its target for the fiscal year ending June by 8.6 per cent to HK$32 billion. New World Development lowered its sales target in response to the curbs.
Only one transaction of existing homes was recorded at 10 of Hong Kong's biggest private residential developments tracked by Centaline, the city's biggest closely held real estate agency, over the March 16-17 weekend.
"The situation is disastrous," said Mr Louis Chan, managing director for residential sales at Centaline. "Potential buyers see these government measures and banks' actions and now they are all getting cold feet."
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