Hong Kong government should lift cooling measures to free up supply in secondary market

It was astonishing to learn that the Hong Kong government has decided to launch a new series of cooling measures to distort market demand for properties instead of seeking to boost home supply by phasing out the restrictive measures on second-hand home sales and purchases.

Last month, the Hong Kong Monetary Authority announced further tightening measures aimed at prospective home buyers with multiple loans and income sources overseas.

The HKMA also tightened the mortgage ceiling for residential properties. For borrowers with outstanding mortgages, the maximum amount they can borrow for residential properties less than HK$10 million in value will be reduced from 60 per cent to 50 per cent of the valuation. For homes worth more than HK$10 million, the lending cap is raised by 10 per cent.

Corporate buyers will also have their loan amount slashed from 50 per cent to 40 per cent. Borrowers with the majority of their income from outside Hong Kong will also see a 10 per cent cut to their loan-to-value ratio.

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Since 2009, the government has tried to clamp down on property price growth by launching similar credit control measures, as well as special stamp duty for non-first-time home buyers, in order to buy time to build more subsidised and private homes or wait for the US to start raising interest rates.

However, while prices have been surging regardless, the existing demand-management measures had a separate adverse effect of reducing the supply of second-hand homes in the market to a trickle.

Second-hand homes have played an important role in maintaining a healthy pipeline of supply in the housing market. In a free market, second-hand homes would traditionally account for as much as 80 per cent of home transactions. However, currently in Hong Kong almost 60 per cent of home sales are newly developed residential properties.

This can be explained by the multiple effects of the credit control and special stamp duty measures. Current home owners are reluctant to sell their homes within 36 months of acquisition, even when they can earn a profit, in order to avoid paying the extra stamp duty, i.e. the special stamp duty. On the other hand, home owners wanting to upgrade to a larger flat, which used to make up a significant portion of home sellers in the market, are shying away from putting their homes on sale because they might be short of cash to meet the higher deposit requirements under the mortgage caps.

As of December 2016, there were about 1.2 million homes in Hong Kong. If only 5 per cent of them are put on the market, as was the situation under normal circumstances, it would mean 60,000 units for sale. Compared with the government’s goal to build 96,000 residential units in the next three to four years, it is a much faster way to immediately boost home supply in the market.

Another factor to explain escalating property prices, such as the record prices paid at the Kai Tak projects, is panic-buying among first-time home owners. As the government has shown no sign of relenting on the cooling measures – which continue to fail to curb property prices – buyers fear prices will only climb even higher. That’s why developers’ new homes continue to fetch record-breaking prices even as they become smaller and smaller in size.

It also touches on the issue of home quality: how the credit cap and special stamp duty work together, unwittingly, to skew the home market towards the purchase of newly-built homes, in particular those so-called “Nano” flats. Not to mention growing families being trapped on the property ladder as they struggle to upgrade their current homes for larger ones to avoid overcrowding.

The way forward for the housing market to achieve a healthier equilibrium is clear: the government should be phasing out the cooling measures. Understandably, there could be concerns of market reaction to an overnight change. That is why I suggest the government consider announcing objective parameters based on which of the cooling measures would be phased out or even lifted. Such parameters include the pace of US interest rate rises, price levels of second-hand homes, and the supply of newly built homes in the market.

I would also suggest the government work closely with real estate professionals in differentiating speculators and investors from genuine end-users, including those in need of upgrading their existing homes for a bigger unit. Certain relaxations from the special stamp duty tax should be considered for such genuine home buyers.

Home affordability is not only a quantitative issue, but also a qualitative one. The government needs to consider what types of homes would best suit the needs of the people, instead of just focusing on the movement in property prices.

Cliff Tse is regional director of the valuation advisory services department at JLL