Hong Kong Homes Face 25% Drop in Year of the Dragon: Mortgages

The Year of the Dragon, representing wealth and power in China, is shaping up to be the opposite for the world’s costliest housing market, Hong Kong.

Mortgages (HKMGLEND) that need to be insured by the government because of risk experienced the steepest plunge in six years in 2011, a sign the biggest home price decline since the global credit crisis is accelerating. Property prices that have slid 6 percent since June may fall as much as 25 percent by 2013, estimates Andrew Lawrence of Barclays Capital, who predicted the initial slide in April.

Asian real estate markets from Singapore to Beijing to Mumbai are stalling or have started declining as governments seek to curb the type of housing bubble that brought down the U.S. economy. In Hong Kong, rising borrowing costs, extra transaction taxes and higher down-payment requirements imposed by the government have fueled the slump.

“We’re in for a very challenging first half,” said Wong Leung-sing, associate director of research at Centaline Property Agency Ltd., the city’s biggest closely held realtor. “The drop in secondary mortgages means buyers are having trouble borrowing from the banks the full amounts they need. The ones that are taking the biggest hits right now are the middle- to lower- priced housing segment.”

Prices had surged 70 percent from 2009 to their 14-year high in June. Home deals in December fell for a sixth straight month to the lowest since November 2008, according to the Land Registry.

Hong Kong will continue measures to maintain stable home prices, Financial Secretary John Tsang said at his annual budget speech today.

36 Percent Drop

Loans covered by the Hong Kong Mortgage Corp.’s insurance program decreased 36 percent in 2011 from a year earlier to HK$26 billion ($3.4 billion), according to figures released Jan. 11. It was the biggest drop since 2006, said the body, which was set up in 1999 to provide government insurance for mortgages exceeding 70 percent of a property’s value -- also known as secondary mortgages -- in a bid to revive slumping home prices at that time.

The HKMC in June 2011 reduced the maximum value of property that can be covered by its insurance program to HK$6 million from HK$6.8 million, the second reduction since late 2010.

Hong Kong’s median home price of HK$3.15 million is a record 12.6 times the annual median household income of HK$249,000, according to a Jan. 23 report by Belleville, Illinois-based Demographia. Second-place Vancouver had a 10.6 multiple, followed by Sydney with 9.2.

Falling Transactions

The number of property transactions with a value of below HK$2 million will probably fall to less than 900 this month, the lowest since record-keeping began in 1996, according to Midland Holdings Ltd. (1200), Hong Kong’s biggest publicly traded realtor.

The Hang Seng Property Index (HSP), which tracks the city’s seven biggest developers including Sun Hung Kai Properties Ltd. (16) and billionaire Li Ka-shing’s Cheung Kong Holdings Ltd. (1), fell 24 percent in 2011, after gaining more than 75 percent over the previous two years.

The gauge fell 0.5 percent at the noon trading break today, reversing an earlier gain. It has gained 12 percent this year, compared with the 11 percent increase in the benchmark Hang Seng Index.

Chinese New Year began on Jan. 23. Dragon years in the 12- year zodiac are associated with wealth and power because the creature is the icon of China’s emperors.

A three-room, 880-square-foot apartment in Tai Koo Shing, one of Hong Kong’s biggest middle-class private housing projects, was sold for HK$7 million this month, HK$1.5 million lower than the original asking price, according to Kenneth Chiu, a district sales manager at Centaline.

Rising Lending Rates

Last year’s decline in prices and transactions coincided with the rise in borrowing costs. Hong Kong banks, led by HSBC Holdings Plc (HSBC) and BOC Hong Kong Holdings Ltd. (2388), increased mortgage rates at least six times since April as liquidity dried up.

Despite the Jan. 25 announcement by U.S. Federal Reserve officials that benchmark interest rates would probably remain below 1 percent through 2014, average mortgage rates in Hong Kong are forecast to rise.

They could reach as high as 4 percent by the end of 2012 from the current 2.38 percent, said Sharmaine Lau, chief economist at mReferral Mortgage Brokerage Services. Borrowing costs were 0.9 percent in early 2011, almost the lowest in 20 years, the company’s data shows.

‘Slightly Faster Fall’

The increase “should weigh on transaction volume and suggests we will see a slightly faster fall in prices,” said Lawrence, the Hong Kong-based analyst at Barclays. “It’s incremental that each time mortgage rates go up, there are less people in the market.”

Liquidity is falling as tightening measures in China have driven companies to borrow in Hong Kong, while capital outflows from the city continue as foreign banks repatriate funds from Asia because of the European sovereign debt crisis.

The Hong Kong Monetary Authority, the city’s de-facto central bank, has asked lenders to keep more reserves as part of their counter-cyclical measures, Chief Executive Norman Chan said in November.

“Hong Kong banks are very reluctant about raising mortgage rates further because of what it may do to transactions,” said Lau. “But at the same time they’re facing a steep increase in funding costs.”

For a HK$2 million, 20-year mortgage, the increased interest rate of 4 percent from 2.38 percent means an extra HK$19,656, or 16 percent, in annual repayments, Bloomberg calculations show.

‘Irrationally Low’

“The last couple years mortgage rates have been irrationally low,” said Lau. “Bringing them back to the 3 to 4 percent range would bring things to a more reasonable level from a historical perspective.”

The HKMA, which doesn’t have an independent interest-rate policy because of the local currency’s peg to the U.S. dollar, has kept its base rate at a record-low 0.5 percent since December 2008.

Hong Kong’s property prices halved between 1997 and 2003 as the city fell into recession brought on by the Asian financial crisis, the Sept. 11 terrorist attacks and the SARS epidemic. Since 2004, prices have recovered while loans drawn down from the HKMC rose for four straight years from 2007 to a record HK$41 billion in 2010.

The government’s mortgage insurance program has been “the way many first-time buyers managed to get into what is an extremely expensive market,” said Lawrence. The next group to be affected will be “the equity-rich, first-time buyers who are going to get priced out of the market.”

‘Determined’

Lawrence forecast in April that home prices might drop because of rising mortgage rates.

To temper surging housing demand, the government has imposed extra stamp duties since 2010 on all homes sold within two years of the date of purchase, while raising minimum down- payment requirements on some property transactions. It has also increased land supply for private housing, and pledged to build more subsidized homes and ensure the supply of land for private housing.

The government is “determined” to increase land supply and will make available at least 47 residential sites for auctions, Financial Secretary Tsang said today. The sites will provide about 13,500 homes, he said.

Buyers Sidelined

“At a time like this, most buyers are staying on the sideline,” said Simon Lo, head of Asia research and advisory for property broker Colliers International. “The general expectation is that home prices will drop further so they are all postponing their homebuyer plans.”

Home prices are also stalling because of the threat of a slowdown in wage increases, Lo said. About 13 percent of Hong Kong firms plan staff cuts in the first quarter, exceeding the previous quarter’s 8 percent, according to a report by New York- based headhunter Hudson Highland Group Inc.

Home prices may need to fall at least 10 percent in 2012 before buyers are lured back, Benjamin Hung, chief executive officer of Standard Chartered Plc (STAN)’s local unit, Hong Kong’s fourth-biggest mortgage lender, said in an interview on Dec. 13.

To contact the reporter on this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net

To contact the editors responsible for this story: Andreea Papuc at apapuc1@bloomberg.net; Rob Urban in New York at robprag@bloomberg.net.

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