Leverage can mean a ton of gain or a world of pain for homebuyers

One of the primary attractions of property as an asset class is the ability to use leverage. By putting a downpayment on a property and getting a mortgage from the bank to make up the rest of the purchase price, you're getting an opportunity that an individual investor would rarely get with other asset classes. Banks are willing to take the risk because they know borrowers will do almost anything to avoid losing their home.

The beauty is that the borrower gets 100 per cent of any profits, having typically only put down 30 per cent of the purchase price in Hong Kong. That's leverage of more than 200 pr cent - you've borrowed more than two-thirds and put down just less than a third - something only institutional investors can achieve in assets such as stocks. Perhaps only futures trading - notoriously difficult to pull off but also much loved in Hong Kong - offers retail investors similar leverage.

But over-borrowing by homebuyers who couldn't really afford the properties they were acquiring was also at the root of the financial crisis in the US. A similar situation occurred in Hong Kong during the property bubble in 1997, which produced a disastrous 60 per cent correction in prices through 2003 after it popped.

The leverage becomes supremely painful in the other direction.

When prices move in the wrong direction, you're also open to 100 per cent of the losses in a property. Your downpayment is wiped out with a 30 per cent downward move. It's easy to fall into 'negative equity' in such situations, oweing more on the home than the home is worth. Banks and borrowers have generally been more restrained this time around in Hong Kong - partly by design of the banks, partly by law. No one institution is allowed to loan more than 70 per cent of a property's purchase price in Hong Kong. And as of November 19 last year, the minimum downpayment is 40 per cent on homes worth more than HK$8 million, and 50 per cent on homes worth more than HK$12 million.

The larger your downpayment, the more room for error if prices move against you. There aren't many signs of over-borrowing at the moment. Mortgage delinquencies are currently at an all-time low in Hong Kong - they stood at 0.01% of all home loans at the start of this year.