When the Leung Chun-ying administration took office in 2012, home speculation had already subsided with the special taxation. Leung endeavoured to resolve the housing problem with abrupt measures rebalancing supply and demand. Apart from a long-term strategy on land supply, Leung imposed new taxes to suppress investment demand and controlled mortgages to reject marginal homebuyers. Supposedly, the housing market would revert to a user-centric model and prices would come down. However, price surged 60 per cent during his term.

In August 2012 a poll found that 55 per cent were neutral and 33 per cent were still positive on housing prices. Following successive demand management (taxation) and counter-cyclical (mortgage) measures, a poll in March 2013 found that sentiment changed. Those negative on the housing price outlook doubled to 29 per cent. The follow up poll in September found that Rise/Fall Gap widened by one-half to 15 percentage points. Housing prices fell by 1.4 per cent in those six months. All looked promising as the Fed formally ended quantitative easing.

Unfortunately, monetary normalisation was not forthcoming and housing supply was disappointing. The double stamp duty is supposedly a way to help homeowners but it also penalises trade-up demand. In particular, homeowners have to serve two mortgages and pay double taxation in the interim. Moreover, interventionist mortgage rules makes it difficult even for new owners to buy in the secondary market. Thus, they turned to the primary market instead, where developers offer financing. The August 2014 poll found that 41 per cent were positive on the housing price outlook, and the Rise/Fall Gap swung from negative 15 percentage points in the previous (September 2013) poll to positive 29 percentage point. Housing prices rebounded 7 per cent.

It was apparent in 2015 that a rate hike was around the corner. Interestingly, the government and bankers were divided in the outlook. The government cautioned buyers of negative mortgages on rising interest rates. However, bankers were reluctant to put up board rates amid excessive liquidity and market distortion. People were confused and views were mixed in the March 2015 poll. When a rate hike was imminent towards year end, the September poll found that sentiment swung negative. Those expecting housing prices to fall doubled to 34.2 per cent.

As expected, the Fed started monetary normalisation at the end of 2015. Despite successive rate hikes, local housing prices remained stable until the government suddenly raised the stamp duty to 15 per cent in November 2016. It was the straw that broke the camel’s back. Sentiment split as some who used to be neutral changed their minds. The latest poll in December 2017 confirmed people were sceptical of interventionist measures after prices rebounded 13 per cent throughout the year.

What has gone wrong? Interventionist measures are interim tools to drive away speculative demand. Taxation is meant to reduce market liquidity. Stricter mortgage requirements are meant to reduce financial gearing. They are not intended for housing demand management and credit risk control. As speculative demand has diminished, they are creating a “liquidity trap” that shrinks the secondary market. Annual turnover used to be 10 per cent or 100,000 cases but has since dropped by almost one-half.

The foreign buyer stamp duty, though undesirable for an open economy like Hong Kong, would not crowd out local demand. The local buyer double stamp duty, however, is punitive particularly to homeowners. Trade-up becomes unaffordable without a bridging loan for down payment and refundable taxation. Secondary supply thus shrank and the market entered the doldrums.

The mortgage market is overregulated as evidenced by the latest banking statistics. The average loan to valuation ratio for November 2017 was 49 per cent and the debt service ratio was 35 per cent, well behind standard banking practice of 70 per cent and 50 per cent. These ratios are inclusive of developer financing above the regulatory threshold of 60 per cent loan ratio and mortgage insurance. One might infer that banks are actually lending to those who are still able to afford conventional terms. Inference is supported by other findings of the December 2017 poll. Some 23 per cent of homeowners of 5 to 10 years and 69 per cent of those over 10 years have paid off their debts ahead of the initial term of 30 years. Even 5 per cent of those who’ve owned for less than five years are debt free.

For five years, the government has disappointed on housing policy. Times have changed. So has sentiment. People are less supportive of interventionist measures and sceptical of demand management. The key to unlocking the impasse is mortgage deregulation and market revitalisation. It might start with normalising mortgage insurance. Government should return mortgage management to private underwriters and restore its role of credit overlay. Until market distortion and overregulation are corrected, the public might still have to live with rising housing prices and global monetary normalisation.

Dr Victor Zheng is associate director of the Hong Kong Institute of Asia-Pacific Studies at the Chinese University of Hong Kong. Roger Luk, a retired banker, is an honorary researcher at the institute