New buyers have no fear of a crash
Housewife Carmen Lee was puzzled when she saw buyers lining up to buy flats at a luxury project in Wan Chai with an average price of more than HK$20,000 per square foot last month.
"Why are they so eager to buy those expensive flats? Don't they worry about a price correction?" she asked. Lee has a good reason to raise the question. She was one of thousands of people hit when home prices crashed during the 1997-1998 crisis.
Lee and her boyfriend had signed to buy a flat at Cheung Kong's Maywood Court for less than HK$4 million at the end of 1996. The unit was ready to be occupied in July 1997 when the British handed over Hong Kong to China.
Then their problems began.
The Asian financial crisis hit and the value of the flat slid under HK$2 million, Lee recalls. "We needed to pay extra money to the lending bank if we wanted to secure a mortgage."
It was impossible for them to pay for the shortfall and they decided to back out of the sale-and-purchase contract. They lost their lifetime savings of HK$1 million which were forfeited to the developer, and they did not get a flat.
Lee, now a mother of two boys, never forgot the effects of a home price crash. But her worries are not shared by newcomers in the market.
Franky Li, a senior marketing executive in his late 20s, bought from New World Development a unit at the Park Signature in Yuen Long, for about HK$2.7 million in September last year. The first-time buyer paid 30 per cent of the property value as down payment.
He does not believe home prices will sink over 30 per cent and rules out a repetition of the 1997-98 crisis that resulted in a large number of people in Hong Kong finding that their homes were worth less than their mortgages or loans. It is a situation similar to what happened in the US subprime crisis when that bubble burst in 2008.
The number of people in Hong Kong under water on their mortgages or loans had risen to 106,000 by the end of June 2003. Since then, the government has done a lot of work to tighten mortgage policies, said Li.
In late 2009, the Hong Kong Monetary Authority (HKMA) began taking steps to reduce the systemic risk in the banking system by lowering the maximum loan-to-value (LTV) ratio for residential properties. The HKMA also began to apply measures to address individual borrowers' risk. Specifically, the banking regulator required banks to stress-test each individual borrower's ability to meet monthly payments at an interest rate higher than current levels.
The latest round of mortgage tightening measures introduced in February last year imposed stringent stress tests by requiring banks to ensure that the debt servicing ratio - comprised of all monthly repayment obligations against the person's monthly income - be capped at 60 per cent even if the interest rate increases by 300 basis points. The debt servicing ratio was just 35 per cent in November 2013, compared to 41 per cent when it was launched in August 2010.
The measures ensured that most new home buyers are in good financial shape and can withstand a market downturn, according to a report released by Macquarie Research last month.