Banks hold the first rung answer
ONE of the hottest topics being discussed in Hong Kong at the moment is the future direction of the residential market, and more importantly, how first-time buyers are going to get their start on the first rung of the housing ladder? While property has never been cheap in Hong Kong, the current problems started with the frenetic market activity in 1991 and 1992, leading to a surge which doubled prices in a little over 12 months.
This was not accompanied by a similar increase in rents so we saw the traditional yields of 10 to 12 per cent fall to five to six per cent.
However, as well as distorting the relationship between rental and capital values, the high market activity has led to record bank lending on residential property and many loan portfolios have become overweighted towards residential mortgages.
If the banks want to redress the balance they can only cut back on mortgage lending, which is now happening.
The other major player in the market is the Government, for many years the main source of new land for residential development as well as being a major developer in its own right through the Housing Authority.
Unfortunately, the Government cannot respond to changing market conditions very quickly and, while the supply of residential land is being increased, we are not going to see any benefit from this until next year or in 1995.
The Government has, however, intervened in the market directly by limiting mortgage lending to a maximum of 70 per cent of a property's value.
Unfortunately, the ''catch all'' nature of the restriction has caught everybody.
The genuine end-user, especially the first-time buyer, is now wondering how he is ever going to be able to buy his own home.
The immediate impact, of course, is that for many people renting is now more affordable than buying.
But with rents rising faster than prices, yields are creeping up towards seven per cent and they may go up to eight per cent by the end of next year, which will shift the balance in favour of the buying market.
However, with a tight money supply, investors are expected to hold on for higher yields rather than continuing the recent rapid growth in sales prices.
Where does this leave the first-time buyer? Clearly, the banks will be cautious about lending on residential property for some time to come, both to balance their loan portfolios and to reduce their exposure to a property market which has achieved very high prices even by Hong Kong's standards.
The next financial year should see a more relaxed attitude by the banks, except that they still need to solve the problem of how to attract higher retail deposits to fund their mortgage lending.
Clearly, if your average investor is going to put his hard-earned money into a bank savings account, the interest rate offered will have to be much more attractive than it is at the moment.
The small buyer is in somewhat of a dilemma.
At the moment it is difficult to find a new flat in the northern New Territories for less than HK$2 million. Popular developments on Hong Kong island cost nearly $3 million.
If the buyer has to find the 30 per cent deposit plus acquisition expenses of up to five per cent, the amount required is $700,000 and $1.05 million respectively, which is beyond the means of many buyers.
However, if the Government's 70 per cent lending limit is universally relaxed then prices are expected to rise again, and the first-time buyer may be completely priced out of the market.
To make matters worse, there is an increasing number of cash buyers coming in from China, and many more can be expected to come as we get closer to 1997, which should ensure that prices continue to rise in the future.
The solution must be for both banks and the Government to make a concerted effort to lend to the genuine first-time buyer, who should be allowed a mortgage of up to 90 per cent of a property's value provided the property is for his own use and that it is his first property purchase.
By all means keep the 70 per cent limit for investors and second buyers, but not for people who genuinely wish to buy their first home.