The Business Times | Mar 23, 2013
Residential property prices could drop by up to 20% in next two years, helping city officials to rein in escalating housing values
[HONG KONG] After struggling in vain for three years to slow the growth in home prices, Hong Kong officials are about to get their wish as the biggest banks in the city raise mortgage rates.
Prices could fall as much as 20 per cent over the next two years, according to Deutsche Bank AG, after lenders including HSBC Holdings, Hong Kong's biggest by assets, and Standard Chartered raise their home loan rates by 25 basis points in response to tighter risk rules.
Hong Kong dollar's peg to the US currency has kept interest rates in the city at near record lows, underpinning a more than 110 per cent gain in home prices since the beginning of 2009 to the most expensive among major global cities. Low mortgage costs, coupled with 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.
"You have this pile of measures plus higher interest rates; this will be a big challenge for the market," said Buggle Lau, chief analyst at Midland Holdings Ltd, the city's biggest publicly traded realtor, which predicted that as many as one third of real estate agent branches in Hong Kong will close.
Chief Executive Leung Chun-ying, who took over in July as head of the government, imposed his toughest price-curbing measures yet on Feb 22 by doubling the stamp duty on all property transactions higher than HK$2 million (about S$322,000). On the same day, the Hong Kong Monetary Authority told banks to maintain the risk weighting for new home loans at a minimum of 15 per cent to help protect them against a drop in residential property values.
London-based 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 Standard Chartered, also headquartered in London, they are from 3.1 per cent to 3.5 per cent.
BOC Hong Kong Holdings, the city's largest mortgage lender, increased its prime-linked mortgage rate to 2.4 per cent to 3.05 per cent, according to a March 20 statement.
Hang Seng Bank, controlled by HSBC, has raised its mortgage rates to 2.4 per cent to 3 per cent. Bank of East Asia upped its prime rate-linked mortgage terms to 2.9 per cent to 3.4 per cent. Major banks in Hong Kong last lifted mortgage rates in November 2011.
"Banks were mispricing their retail mortgage loans," Sebastian Paredes, chief executive officer for Hong Kong at DBS Group Holdings Ltd, South-east Asia's largest bank, said in a March 8 interview. "Now with the new measures from HKMA, they will be forced to correct it."
The rate increases may finally put a dent in prices, which have climbed 16 per cent since Mr Leung was sworn in on July 1, according to an index compiled by Centaline Property Agency Ltd.
"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," Tony Tsang and Jason Ching, analysts at Deutsche Bank, wrote in a March 13 report.
A 60-square-metre apartment on Hong Kong Island cost about HK$125,000 per square metre in January, according to the Rating and Valuation Department. By that calculation, it would cost about HK$7.5 million (US$970,000) on average. An equivalent-sized apartment in Manhattan would cost about US$700,264, according to Miller Samuel Inc and brokerage Douglas Elliman Real Estate.
Since 2010, Hong Kong has imposed an extra tax of up to 20 per cent of the value of homes on buyers who resell them within three years after purchasing, and raised the minimum downpayment requirement on mortgages for homes valued at more than HK$7 million. In October, Mr Leung, imposed an extra 15 per cent tax on all home purchases by companies and non-permanent residents, and promised to raise land supply for private development and to build more government housing.
While the impact on prices has yet to surface, the measures have reduced 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.
Total home transactions may fall below 3,000 this month and prices may drop as much as 10 per cent this year, said Midland's Mr Lau. That would be the fewest monthly deals since 2003 when Hong Kong was nearing the end of a six-year property slump brought on by the Asian financial crisis, the burst of the dotcom bubble and the Sars epidemic.
Developers are responding. Cheung Kong Holdings , the builder controlled by Li Ka-Shing, the territory's richest man, cut prices at one of its projects by 11 per cent on March 5, while Sun Hung Kai Properties, the city's biggest builder by value, on Feb 28 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.
Macquarie Securities has an underweight rating on Hong Kong's property market and is expecting home prices to drop 10 per cent in 2013, said analyst David Ng.
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