Here’s how Hong Kong let the air out of its property bubble without popping it
- Steps to increase supply, tighten lending and raise borrowing rates are expected to help Hong Kong from seeing a major crash in home prices. And luck gets some credit, too
Less than two months ago, Hong Kong was named home of the world’s biggest property bubble. Now it may become known as the model for how to slowly deflate a bubble and avert a painful burst.
Signs the air is slowly seeping out of the bubble are growing:
Home prices slipped some in August and September – after a 28-month bull run that drove up prices by 45 per cent. Long queues of hungry buyers are far shorter. Even auctions of foreclosed homes are coming up short of bidders.
Meanwhile, property watchers are pretty much in agreement that the decline in home prices will be between 10 per cent and 15 per cent over the coming year. That would be a much softer landing for the city and its people than the double whammy delivered by the Asian Financial Crisis and the SARS epidemic, when prices plunged 66 per cent between October 1997 and July 2003.
Steps by Chief Executive Carrie Lam’s administration to boost housing supply and by the city’s de facto central bank to raise loan rates and order banks to tighten lending rules are helping this property market downturn not spiral into a horror show, experts say. Combined, these have contributed to the growing negative sentiment that is tamping down home prices.
To be sure, luck is playing a role this time as well.
GDP is frisky right now, and the jobless rate is at a 20-year low. Hongkongers have become even bigger savers, giving them a cushion to ride out hard times. And, unlike back during the 66 per cent bust, when more than 100,000 borrowers saw their homes fall into negative equity, only a few hundred of the city’s residents are expected to see their home values drop below what they still owe.
“We expect property prices in Hong Kong to soften by 10 to 15 per cent over the next 6 to 12 months,” said Dennis Lam, equity analyst CIO of UBS Hong Kong.
“It sounds like a lot. But if you think about where prices were at the beginning of the year versus the peak in August, it was up 14 per cent. So this mild crash over the next 6 to 12 month is merely getting back to where prices were in the beginning of 2018, or late 2017, which is still miles away from where we were in the 2008 financial crisis.”
“The UBS Global Real Estate Bubble Index” released in September put Hong Kong at the very top of cities around the globe in an overvalued bubble. That was above Munich, followed by Toronto, Vancouver, Amsterdam and London. In the US, San Francisco came in ninth place, ahead of Los Angeles (12th), New York (16th), Boston (17th) and Chicago (20th).
“It is a combination of both policy signals from the government – that interest rates have started to rise and most market participants are factoring in more rate hikes going forward, and at the same time macro risks,” Lam said of why UBS expects a softer landing for Hong Kong this time.
Falling property prices hurt the city’s economy by dampening consumption, increasing unemployment, reducing property sector investment, and lowering fiscal income from property-related taxes and land-sales income, which also lowers government spending. Hao Hong, head of research at Bocom International, a subsidiary of Bank of Communications, said every 10 per cent drop in property prices shaves off 0.3 per cent of gross domestic product.
Of course, there are some unknowns that could make things worse.
China’s slowdown could deepen, hurting Hong Kong’s economy and drying up home buying by mainlanders. The US-China trade war could worsen. And then there are possible one-offs that could come out of nowhere, like the SARS respiratory illness.
Another concern is hard-to-resist lending deals by developers to lure those without deep pockets into home buying.
The Hong Kong Monetary Authority ordered banks to clamp down on loan sizes in 2015 – from 70 per cent to no more than 60 per cent of sales prices – to try to wring out default risk. The average loan-to-value ratio has dropped to 44 per cent now in Hong Kong from 65 per cent during the SARS outbreak, meaning homeowners have more equity than debt. But developers stepped in to offer more of their own financing for flats to juice up buying.
With offers to lend as much as 35 per cent of a home price on top of the bank’s 60 per cent, that has meant buyers have put down as little as 5 per cent to 10 per cent to purchase a flat.
It is those people who are at most risk to go into negative equity, experts say.
For example, if on a HK$8 million (about US$1 million) flat, the buyer put down 10 per cent – or HK$800,000 – he or she would owe HK$7.2 million to the bank and developer. But if prices fall more than 10 per cent, as is expected, that buyer would fall into negative equity, owing more than the property could fetch if sold.
The number of these type of top-up loans has shot up, and they are the riskiest of all in a falling property markets, said Samuel Tse, a Hong Kong economist at DBS Bank.
Sun Hung Kai Properties deputy managing director Victor Lui Ting rejected suggestions that its financing offers would put homebuyers at high risk, saying most of them had repaid their loans within six to 12 months and shifted to banks, which charge lower interest.
Two years ago, SHKP joined rivals to offer flexible financing to drum up sales. In 2016, it offered mortgage loans of up to 120 per cent of a flat’s value without the need to submit proof of income to boost sales at the Park Yoho Venezia project in Yuen Long. But the deal only applied to buyers who already owned an apartment with a value of no less than 70 per cent of the purchase price of the new flats in 2016.
“The financing scheme of 120 per cent home loan was effectively translated to a 60 or 70 per cent loan-to-value ratio,” said Lui, “ It is just a kind of short term bridging loan to allow our buyers sufficient time to sell their old homes or their stock investment to fund the purchase of the new flats.”
SHKP extended HK$5 billion in financing on HK$30 billion to HK$40 billion in annual sales revenue, he said.
But, with buyers becoming more wary, developers are finding it harder to sell, even with come-ons.
HKMA chief executive Norman Chan Tak-lam told the Legislative Council on Monday that buyers who took out financing offers by developers would fall into negative equity if home prices declined more than 10 per cent.
But these developer top-ups only account for about 2 per cent to 2.5 per cent of total mortgages in Hong Kong, which is not threatening to the overall financial system, said Arthur Yuen, deputy chief executive of HKMA.
As of September, there were HK$1.29 trillion worth of unpaidmortgages, and the mortgage delinquency ratio remained unchanged at 0.02 per cent, according to data from the banking regulator.
Meanwhile, the government has launched a total of eight rounds of cooling measures for the property market since June 2009. These include lowering the applicable loan-to-value ratio and debt-servicing ratio, which is the ratio of cash available for debt servicing to interest, principal and lease payments.
Chan said that while there is no reason to think the quality of the loan portfolio of Hong Kong banks is worse than before, the authority will continue to monitor the bad-debt ratio of banks.
Nicole Wong, the regional head of property research at CLSA, says the steps taken by policy makers and the overall health of the economy would protect the city’s homeowners even in a 30 per cent downturn, which is far worse than she expects.
Additional reporting by Yujing Liu