HKMA raises home down-payment ratio. How will this affect HK property prices?
The Hong Kong Monetary Authority (HKMA) has ordered local banks to tighten down-payment ratios for home buyers for the fourth time in the past two years as part of an ongoing attempt to control the rates of surging property prices in Hong Kong.
Buyers of homes costing more than HK$10 million will be required to increase up-front payments to 50 percent, it was announced on Friday. For properties valued between HK$7 million and HK$10 million, home buyers will have to pay 40 percent up front with the maximum loan amount capped at HK$5 million.
Buyers of properties valued below HK$7 million can still make a down-payment of 30 percent with the loan capped at HK$4.2 million.
Home prices in HK continue to rise, both as a result of ultra-low mortgage rates which appear to stay low for an "extended period of time", an due to an influx of mainland buyers, tight land supply and increased demand by foreigners wanting to move to Hong Kong as a base for business activities across Asia, due to the low Hong Kong tax rate.
"By increasing the up-front payments of home buyers, the measures will increase the investment costs of property buyers and investors," HKMA Chief Executive Norman Chan told reporters on Friday, adding that the news measures were to take immediate effect. "They will also help the ability of local banks to withstand any potential mortgage loan defaults if the local home market exhibits a downward trend."
The HKMA also ordered local banks to raise down-payments for non-local residents for better risk management. Mortgage loan borrowers whose income is primarily from outside Hong Kong will need to make a higher down-payment of at least 10 percentage points regardless of property types or values. For those who secure their mortgage loans based on net worth rather than income streams, they will have to increase the down-payment to 60 percent.
"The local home market has been volatile and is being determined by various complex factors such as land supply, interest rate movement, global liquidity and income growth expectation. Although the property market cooled down a bit in March and April this year, there are now signs of renewed exuberance following high transaction prices recorded in recent government land sale auctions," HKMA's Chan cautioned at Friday's press briefing.
"The significant change is the new rule about overseas buyers since it's obviously targeting the mainland buyers," Eva Lee, analyst at Macquarie Securities Ltd, said in Hong Kong. "What it does is it may create a psychological impact on them: They may start expecting more measures to come that are targeting them."
He Guangbei, vice-chairman and chief executive of one of the leading and best managed retail banks in Hong Kong, BOC Hong Kong (Holdings) Limited, said that although the HKMA measures would have an effect on the market it was still too early to "quantify the impact".
Nicole Wong, regional head of property research at CLSA, said she still forecast property prices to rise for the rest of this year. "Mainland investors will still favor Hong Kong," Wong said. "They are not likely to be affected by mortgage tightening as many of them prefer to make a one-off full payment."
So how will the HKMA's recent move affect property prices in Hong Kong? My views on the HKMA's moves are that this is a sensible thing to do. The HK Government wants to continue to see solid, stable growth in property prices of 10-15% per annum in Hong Kong. Such increases are beneficial for property owners, developers, banks, people working in the property industry, and a lot of Government revenue comes from taxes on property transactions. What the Government is trying to avoid the risk of a boom-bust, such as occurred back in 1997.
One reason why property in HK will continue to be an attractive investment is that the interest rate for borowing in HK dollars is virtually nothing - perhaps 1% per annum. The outlook for interest rates in HK is to remain at this level for the next few years, as due to the HKD peg to the USD, HK interest rates are in effect dictated by US monetary policy and US rates.
Due to the current state of the US economy, rates in the US are likely to remain low. This might work well for the US, where the Fed is hoping to gradually help property prices recover after the recent US property bubble bust. But the effect it has in HK, which is at the heart of the Asian region which as a whole is booming with growth, is to push prices continuously higher.
Due to the USD peg, HK does not have the ability to increase borrowing rates. What it can do though, to moderate growth, is to require banks to increase deposit rates for loans. And this is what they have done. Creative borrowers (and creative banks) will always find ways around such guidelines, but in general the requirements will help slow growth. These measures also help keep banks in better shape, helping to avoid the kind of disaster that occurred in the US over the last few years.
If and when interest rates finally rise in the US (and thus in HK) the HKMA will gradually reduce the % deposit requirement for property loans. My assumption is that for every 50 basis point rate increase (ie .05%), the HKMA will reduce deposit rate requirements by 5%.
Eg from 50% deposit rate now, with a borrowing cost of 1%, to 45% deposit rate if borrowing costs rise to 1.5%.
40% deposit rate if borrowing costs rise to 2%
35% deposit rate if borrowing costs rise to 2.5%
30% deposit rate if borrowing costs rise to 3%
25% deposit rate if borrowing costs rise to 3.5%
20% deposit rate if borrowing costs rise to 4%
15% deposit rate if borrowing costs rise to 4.5%
10% deposit rate if borrowing costs rise to 5%
In this way, controlled property price growth will be achieved, in a way that is best for Hong Kong's long term interests.
Buyers of homes costing more than HK$10 million will be required to increase up-front payments to 50 percent, it was announced on Friday. For properties valued between HK$7 million and HK$10 million, home buyers will have to pay 40 percent up front with the maximum loan amount capped at HK$5 million.
Buyers of properties valued below HK$7 million can still make a down-payment of 30 percent with the loan capped at HK$4.2 million.
Home prices in HK continue to rise, both as a result of ultra-low mortgage rates which appear to stay low for an "extended period of time", an due to an influx of mainland buyers, tight land supply and increased demand by foreigners wanting to move to Hong Kong as a base for business activities across Asia, due to the low Hong Kong tax rate.
"By increasing the up-front payments of home buyers, the measures will increase the investment costs of property buyers and investors," HKMA Chief Executive Norman Chan told reporters on Friday, adding that the news measures were to take immediate effect. "They will also help the ability of local banks to withstand any potential mortgage loan defaults if the local home market exhibits a downward trend."
The HKMA also ordered local banks to raise down-payments for non-local residents for better risk management. Mortgage loan borrowers whose income is primarily from outside Hong Kong will need to make a higher down-payment of at least 10 percentage points regardless of property types or values. For those who secure their mortgage loans based on net worth rather than income streams, they will have to increase the down-payment to 60 percent.
"The local home market has been volatile and is being determined by various complex factors such as land supply, interest rate movement, global liquidity and income growth expectation. Although the property market cooled down a bit in March and April this year, there are now signs of renewed exuberance following high transaction prices recorded in recent government land sale auctions," HKMA's Chan cautioned at Friday's press briefing.
"The significant change is the new rule about overseas buyers since it's obviously targeting the mainland buyers," Eva Lee, analyst at Macquarie Securities Ltd, said in Hong Kong. "What it does is it may create a psychological impact on them: They may start expecting more measures to come that are targeting them."
He Guangbei, vice-chairman and chief executive of one of the leading and best managed retail banks in Hong Kong, BOC Hong Kong (Holdings) Limited, said that although the HKMA measures would have an effect on the market it was still too early to "quantify the impact".
Nicole Wong, regional head of property research at CLSA, said she still forecast property prices to rise for the rest of this year. "Mainland investors will still favor Hong Kong," Wong said. "They are not likely to be affected by mortgage tightening as many of them prefer to make a one-off full payment."
So how will the HKMA's recent move affect property prices in Hong Kong? My views on the HKMA's moves are that this is a sensible thing to do. The HK Government wants to continue to see solid, stable growth in property prices of 10-15% per annum in Hong Kong. Such increases are beneficial for property owners, developers, banks, people working in the property industry, and a lot of Government revenue comes from taxes on property transactions. What the Government is trying to avoid the risk of a boom-bust, such as occurred back in 1997.
One reason why property in HK will continue to be an attractive investment is that the interest rate for borowing in HK dollars is virtually nothing - perhaps 1% per annum. The outlook for interest rates in HK is to remain at this level for the next few years, as due to the HKD peg to the USD, HK interest rates are in effect dictated by US monetary policy and US rates.
Due to the current state of the US economy, rates in the US are likely to remain low. This might work well for the US, where the Fed is hoping to gradually help property prices recover after the recent US property bubble bust. But the effect it has in HK, which is at the heart of the Asian region which as a whole is booming with growth, is to push prices continuously higher.
Due to the USD peg, HK does not have the ability to increase borrowing rates. What it can do though, to moderate growth, is to require banks to increase deposit rates for loans. And this is what they have done. Creative borrowers (and creative banks) will always find ways around such guidelines, but in general the requirements will help slow growth. These measures also help keep banks in better shape, helping to avoid the kind of disaster that occurred in the US over the last few years.
If and when interest rates finally rise in the US (and thus in HK) the HKMA will gradually reduce the % deposit requirement for property loans. My assumption is that for every 50 basis point rate increase (ie .05%), the HKMA will reduce deposit rate requirements by 5%.
Eg from 50% deposit rate now, with a borrowing cost of 1%, to 45% deposit rate if borrowing costs rise to 1.5%.
40% deposit rate if borrowing costs rise to 2%
35% deposit rate if borrowing costs rise to 2.5%
30% deposit rate if borrowing costs rise to 3%
25% deposit rate if borrowing costs rise to 3.5%
20% deposit rate if borrowing costs rise to 4%
15% deposit rate if borrowing costs rise to 4.5%
10% deposit rate if borrowing costs rise to 5%
In this way, controlled property price growth will be achieved, in a way that is best for Hong Kong's long term interests.
I'm just glad we bought when we did because if we had waited a few more months we would of been unable to with all these new measures, higher rates and of course, higher purchasing prices. The early bird catches the worm, hopefully there won't be a big crash mind lol !
ReplyDeleteHi Alison. Yes, buyer, like yourself, are of course feeling quite satisfied with themselves right now. Prices are rising, and the outlook for rates are low. And yet some of the new measures inteded to slow buying mean that people who want to buy now need to continue to rent (which benefits landlords who already own).
ReplyDeleteI feel prices will continue to rise for a long time, as over the next decade Asia will continue to boom.
For Park Island specificaly, I think the outlook is really bright, as apart from the expected continued rises in wealth and prices in HK and Asia generlaly, Park Island is a superb development, which is still only just starting to become known by many potential buyers and residents.
Its pretty much a certainty that as people get more educated, and wealthier, they will look for a place in HK to live that offers clean air, great facilities, high quality buildings, etc.
i think prices will drop a little bit but then rise and rise as Park island is very nice and quite not well known yet.
ReplyDeleteIts a very good article and reasoning you have here. I agree with all the points you have made, that if or when rates do rise, maybe in the year 2016 at this stage, the banks will slowly be allowed to lend more, so we will still get a reasonable pace of growth in prices. Also, Park Island is very very reasonble priced for the quality, so in any case it will probaly keep rising and as not many buyers are pure speculators the prices will stay stable when rates finally rise.
ReplyDeleteI am revisiting this article that I wrote in 2011, and it does seem that so far I was entirely correct. To the anon person who posted above predicting rates might rise in 2016, your prediction also seems relatively accurate. One additional point I might add to my original article, is that as rate rise, the HKD might also rise, so from an international perspective, even if HK property prices slow their rising, they might still be rising comparatively on a constant currency basis if compared to non HKD currencies.
ReplyDeleteThis is good reading and does make me think HK is doing the right thing as when rates rise it will keep the market stable.
ReplyDeleteThis will not effect genuine buyers much except they will need to get more deposit together. But it will lead to prices going up when they remove the ratios of max lending back again to higher borrowing ratio allowed.
ReplyDelete