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H.K. Tightens Mortgages, Will Supply More Land to Avert Bubble

Hong Kong will tighten mortgage lending rules and increase the supply of land as the government intensifies a campaign to suppress what Financial Secretary John Tsang called a “rare” gain in home prices.

Down payments for apartments costing HK$12 million ($1.54 million) or more will rise to 40 percent, from 30 percent, with immediate effect, Hong Kong Monetary Authority Chief Executive Norman Chan said yesterday. The government will increase land sales next year, Tsang said earlier.

The government has been seeking to rein in home prices that have soared about 40 percent since the beginning of 2009, boosted by mortgage rates at the lowest in two decades and buying by mainland Chinese. Tsang said home prices are approaching the level of 1997, the height of a previous bubble that was followed by a six-year slump.

“This is a serious attempt by the government to slow the growth in property prices,” said Nicole Wong, regional head of property research at CLSA Asia Pacific Markets in Hong Kong. “Maybe a lot of people still have HK$4.8 million for a down payment on a HK$12 million flat, but luxury is a leading sector and this is sending a message that this is serious.”

The Hang Seng Property Index of seven of the largest property developers in the city has declined 1.1 percent this year. It closed 0.7 percent lower at the 4 p.m. market close in Hong Kong yesterday.

Home prices will rise a further 10 percent to 15 percent by year-end, Cusson Leung, an analyst at Credit Suisse Group AG forecast before yesterday’s measures.

Economic Growth

The measures came as Hong Kong’s economy expanded a more-than-estimated 6.5 percent in the second quarter, according to a government report yesterday. The pace of growth compared with the 6.3 percent median forecast of 13 economists in a Bloomberg News survey.

Hong Kong’s economy will grow between 5 percent and 6 percent for the full year, the government said yesterday, revising up a previous forecast.

For properties worth HK$12 million or less, the maximum loan amount will be capped at HK$7.2 million, meaning down payments will increase for any property valued above HK$10.3 million. Luxury homes in the city are defined as those costing at least HK$10 million, or bigger than 1,000 square feet.

Down payments for investment properties will rise to 40 percent from 30 percent, Chan said.

Stress Tests

Hong Kong banks will be asked to apply stress tests on mortgage rates rising 2 percentage points, HKMA’s Chan said. Mortgage borrowers’ debt-to-income ratio should not be higher than 60 percent when the interest rate increases by 200 basis points, Chan said.

The value of outstanding mortgage loans rose to HK$679.5 billion as of June 30 from HK$587.6 billion at the end of 2008, according to data compiled by Bloomberg.

“We want to remind all potential homebuyers that the interest rate right now is at a very abnormal level and it is impossible for this to be sustained,” Chan said.

Since the early 1990s, Hong Kong banks have been restricted from lending more than 70 percent of the purchase price of a home, to reduce the risk of loan losses from a market crash. To help the market recover from the 1998 crash, buyers were subsequently allowed to borrow a further 15 percent of their home’s value as long as they obtained mortgage insurance, a move that increased affordability while limiting risk for banks.

New Approvals

The market has already been cooling, with new mortgage approvals declining to HK$35.4 billion in June, down 6.2 percent from May, according to HKMA data. Some 0.03 percent of mortgage loans were delinquent, while only 310 owners in the city owe more on their homes than their properties are worth.

The average value of new home loans made in June was HK$2.31 million, according to the HKMA.

Hong Kong banks are offering mortgage terms as low as 70 basis points above the one-month Hong Kong interbank offered rate, which is currently at 0.22 percent, according to mortgage broker mReferral Mortgage Brokerage Services.

The government will offer sites for auction next year in the Chai Wan, Hung Hom and Fanling districts, and will work with MTR Corp. and the Urban Renewal Authority to increase land supply, Tsang said. MTR is one of the biggest owners of unoccupied residential sites in Hong Kong. It may also change the purpose of some land to residential, he added.

Government Sales

Most government land sales in recent years have been triggered by developers who promised to pay minimum amounts for sites on a list of available lots under the so-called land application system. Regular government land auctions have been partially resumed this year after they were halted in 2004 to support falling home prices.

“The key to the issue of ever-rising home prices is shortage of supply and that the government has to wait at least a few years from now to see the effect of increasing land supply on the property market,” said Irina Fan, an economist at Hang Seng Bank Ltd. in Hong Kong. “The risk of asset-price bubbles will continue to grow as we expect the low interest rate environment will last for an extended period.”

The government will raise the cancellation fees to 10 percent of deposits from 5 percent, and ban the resale of new flats before transactions are completed, Tsang said. Speculation in the Hong Kong market needs attention and the measures will increase the cost for speculators, he said.

“Flat prices in some popular developments are fast approaching historical highs,” said Tsang. “We are determined to stop speculative activities in the property market.”

Luxury Projects

Sun Hung Kai Properties Ltd., Hong Kong’s biggest developer, said this week it has sold almost 500 units of its luxury Larvotto project in the Island South district since sales began in mid-July. The apartments have been selling for an average of HK$30 million.

Billionaire Lee Shau-kee’s Henderson Land Development Co. said it plans to sell 10 new apartments at its 39 Conduit Road project that are priced at as much as about HK$186 million.

“The property market in the past few months has really been rising a bit too fast and too much, so these measures are understandable,” said James Cheung, director at the surveyor unit of Centaline Property Agency Ltd., one of the city’s biggest real estate agencies. “Regardless, the market will probably cool down a bit in the near term. Whether they’ll have any long term impact depends on how stringent the measures are.”

Hong Kong raised down payments for flats costing more than HK$20 million to 40 percent from 30 percent in October. The same month the Hong Kong Mortgage Corp. limited home loan insurance to homes of no more than HK$12 million and suspended insurance for homes that aren’t owner occupied. The government also has clamped down on marketing practices it criticized as deceptive.

Mortgage Insurance

The Hong Kong Mortgage Corp. said yesterday it will suspend insurance for mortgages higher than 90 percent of the purchase price.

Stamp duty on homes selling for more than HK$20 million was increased to 4.25 percent from 3.75 percent this fiscal year starting April 1.

Hong Kong is following in the footsteps of China, where the government has moved to curb soaring housing prices by raising the minimum down-payments and mortgage rates for buyers of multiple properties, and ordering lenders to halt third-home loans in areas with “excessive price gains.”

Property prices in China’s 70 major cities climbed 10.3 percent in July from a year earlier, the weakest pace in six months, according to the National Bureau of Statistics. They rose at a record pace in April.

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