Hong Kong’s chief executive says she will keep the public purse away from bailing out the property industry
- Negative equity, in which a property’s value falls below the amount of the loan used to buy it, is already afflicting scores of home buyers who entered the market at the top
- The last of Hong Kong’s negative equity households took more than a decade to climb out of their debt trap
Hong Kong’s government, which has repeatedly warned against speculation in the world’s most expensive property market, said it would keep public money away from any bailouts of the industry, as the city’s home prices and sales end a decade-long boom.
“Don’t count on the government rescuing the [property] market,” Chief Executive Carrie Lam Cheng Yuet-ngor said during the Hong Kong Economic Journal’s Economic Summit 2019 conference in Hong Kong. “The downward adjustment has not even offset the increase at the beginning of this year.”
Lam’s comments come as rising mortgage rates have piled on to increasing housing supply – engineered by her administration through a proposed “vacancy tax” – and an escalating US-China trade war to weigh on the city’s home prices.
The median cost of live-in homes has dropped by 3.7 per cent since August, as the city ended 28 consecutive months of ever-rising prices.
Homebuyers can expect prices to decline by another 10 per cent to 15 per cent next year, according to forecasts by Centaline Property and Midland Realty, the two agencies that dominate the city’s real estate sales.
“Investment volume next year will definitely fall,” said Reeves Yan, Colliers’ executive director of capital markets and investment services. “Investors will not make a move until they see a clear trend in the US-China trade war, and that will not happen until the Lunar New Year.”
Declining prices are already trapping scores of homeowners in negative equity, as the market value of their purchases have fallen below the amount of their home loans.
Negative equity, the scourge of many a declining property market, peaked in Hong Kong in 2003 after an outbreak of severe acute respiratory syndrome (Sars) sent already struggling home prices tumbling.
More than 105,000 households found themselves in negative equity at that time, according to data by the Hong Kong Monetary Authority (HKMA). It took a sixfold surge in property prices over 14 years for the last household to work itself out of the debt trap, the data showed.
Officials of Lam’s administration, including Financial Secretary Paul Chan Mo-po, and even the HKMA’s chief executive Norman Chan Tak-lam, had been at pains to warn Hong Kong’s homebuyers through their radio broadcasts, blogs and public statements to be wary of rising mortgage rates.
Tiny abodes – known variously as micro apartments or nano flats – located in older buildings are the most vulnerable to the spectre of negative equity, because banks tend to be more conservative in their valuations when the market takes a turn for the worse.
Already, signs of the slowdown are visible. A weekend sales launch in Tuen Mun had to close early when only two units were sold at the T-Plus project, which was offering 27 units, each measuring around 130 square feet (12 square metres).
“Investors are heading to the sidelines as they see a lot of uncertainty in the local economy, while the cost of financing has risen with higher interest rates”, said Joseph Tsang, managing director at JLL, a property consultant.
Hong Kong’s era of low mortgage rates ended in September, as banks raised borrowing costs after key interest rates increased in lockstep with the US Federal Reserve’s tightening monetary policy.
A July proposal to impose a vacancy tax also put an end to developers’ hoarding of completed property, forcing them to add to housing supply.
As a result, developers are slashing prices to clear their housing inventory. The cooling market will soon establish a benchmark to see if lower prices can drum up sales.
Sino Land will launch its 440-unit Grand Central project in eastern Kowloon's Kwun Tong district this week, at an average price of HK$17,388 per square foot (US$206 per square metre), 14 per cent cheaper than the price of lived-in abodes in the same neighbourhood.