Hong Kong’s new leader is taking up the battle his predecessor failed to win, seeking to overcome record low mortgage rates and an influx of Chinese buyers to make housing in the world’s most expensive city more affordable.
Leung Chun-ying, the property surveyor who took over as the city’s chief executive in July, on Aug. 30 said he’ll boost the supply of homes and start drafting laws giving preference to locals over buyers from mainland China. He’s trying to cool prices that surged 85 percent since 2009 even as predecessor Donald Tsang raised minimum mortgage deposits, added taxes and increased land sales in a losing bid to stem the boom.
Like Tsang, Leung has had to tweak demand and supply through curbs and land releases rather than monetary policy as Hong Kong’s currency peg to the U.S. dollar pushes borrowing costs to a record low. Banks, including HSBC Holdings Plc and Standard Chartered Plc, are charging homebuyers an average 2.17 percent, less than half that of six years ago, fueling demand along with the rising wealth of buyers from China’s mainland.
“Whenever government measures were rolled out in the past few years, the market stabilized for a while and then regained the upward momentum,” said Lawrence Lam, Hong Kong-based director of sales and secured lending at Citigroup Inc. “Property prices are under pressure to climb as interest rates are still low.”
That’s unlikely to change in the next couple of years. U.S. Federal Reserve Chairman Ben Bernanke has pledged to keep interest rates low until at least 2014 and on Aug. 31 made the case for further easing to reduce unemployment in the world’s largest economy. The Hong Kong Monetary Authority keeps its lending rate tied to the Fed to maintain the currency’s peg to the U.S. dollar.
Tsang raised the minimum deposit for some mortgages three times since August 2010, with borrowers now having to put down 40 percent for home purchases of more than HK$7 million ($902,000). He also introduced an additional stamp duty on residential units sold within two years of purchase.
While transactions are down, prices are up. The value of new mortgages fell 42 percent to HK$98.1 billion in the first seven months of this year, while the number of homes sold dropped 22 percent, according to data from the HKMA and the Land Registry. Home prices have gained 12 percent this year, according to Centaline Property Agency Ltd.
BOC Hong Kong Holdings Ltd., the biggest Hong Kong-based lender, has risen 27 percent this year, the best performer in the 12-member Hang Seng Finance Index. Hang Seng Bank Ltd. has the second best return in the index with 19 percent. The two lenders accounted for a combined 32 percent of the city’s mortgage market, according to mReferral Mortgage Services.
“The property measures have limited impact on banks,” Dominic Chan, an analyst at BNP Paribas SA in Hong Kong, said by telephone. “To a certain extent, you can say the impact is actually positive to banks as they control banks’ risks and exposure to property lending.”
The seven-member Hang Seng Property Index, which tracks the city’s developers, has risen 0.5 percent since Leung announced the new measures after the market closed Aug. 30. China Resources Land Ltd. and Henderson Land Development Co. were the biggest gainers with 4.7 percent and 2.3 percent. The property index fell 0.3 percent at the close of trading today.
Before this year’s rebound, home prices fell 4 percent in the last three months of 2011, the biggest quarterly drop since the global credit crisis, after Tsang’s June mortgage restrictions and as China’s economy began to slow.
Hong Kong home prices are 65 percent higher than Tokyo’s, the world’s second-priciest place to buy a home, according to a study by Savills Plc published last September that compares prices in 10 global cities including New York and London.
The average deposit cost for a first-time home buyer in Hong Kong is now equivalent to 3.3 times the city’s annual household income. That’s nearing the level in 1998 on the eve of the city’s last property crash, when home prices lost two-thirds of their value in a year, according to an Aug. 22 report by Barclays Plc. The average monthly mortgage payment is 47 percent of household income, the London-based bank said.
Still, there’s “few alternative investment options for those cash-rich property investors to switch into,” wrote Andrew Lawrence, a Hong Kong-based property analyst at Barclays, in a Aug. 31 report. Leung’s measures are “not sufficient to cause a material correction in property prices.”
HSBC, Hong Kong’s biggest bank by customers and deposits, pays just 0.2 percent for a 12-month fixed deposit of more than HK$1 million. The average rental yield on Hong Kong homes was 3.5 percent at the end of July, according to Centaline, Hong Kong’s biggest closely held realtor.
Tsang, who led Hong Kong from 2005 to July this year, in 2010 resumed regular land auctions by the government, the main supplier of land for development in the city. Tung Chee-hwa, his predecessor, halted the practice in 2004 and replaced it with a system under which land sales were triggered by developers.
While most of Leung’s 10-point package is an extension of the initiatives started by Tsang, he pledged to tackle one area that his predecessor had shied away from: putting a stop to buyers from other Chinese cities who accounted for more than half of new property sales in the third quarter of last year.
“He has fired a warning shot and the message is clear,” said James To, a lawmaker from the Democratic Party. “He’s telling the market not to push him into rolling out even tougher measures. At the same time he’s buying time so he can formulate policies to boost supply and bring down prices in the long run.”
The government will restrict buyers of apartments on two sites it plans to sell next year to local residents, Leung said today, a week after flagging it will begin drafting laws that may be incorporated into land sale agreements to put restrictions on purchases by people outside of Hong Kong.
Leung, who was elected in March by a committee of mostly professionals, businessmen -- including the heads of the city’s biggest developers -- and lawmakers, pledged during his campaign to address the city’s widening income gap and public’s discontent that housing is becoming unaffordable for the general public. His credibility has been challenged by lawmakers after his home was found to have illegal building works and his development secretary stepped down to address corruption allegations.
“To confront the real estate developers, he’ll need tremendous support from the community,” said Joseph Cheng, a professor in political science at the City University of Hong Kong. “It’s a very serious political struggle and at the moment he certainly doesn’t have the popularity and political support necessary.”
Leung’s new measures will only boost housing supply by about 1,800 units in total, according to Centaline. The government expects developers to supply 65,000 private units over the next three to four years and will make available 75,000 public housing units for sale, Leung said Aug. 30.
A typical 600 square-foot apartment on Hong Kong Island costs an average of about HK$5.5 million, or HK$9,100 per square foot, according to estimates by Midland Holdings Ltd., the city’s biggest publicly traded realtor.
Leung, an adviser to both Tung and Tsang, may be reluctant to introduce overly stringent property curbs, worried that a pullback in home prices will lead to recession, according to Louis Chan, managing director for residential sales at Centaline.
China’s economy expanded 7.6 percent in the second quarter from a year earlier, the slowest pace in three years, as Europe’s debt crisis crimped exports and the government’s property crackdown cooled domestic demand. The slowdown may extend into a seventh quarter, with Deutsche Bank AG cutting its growth estimate for the three months through September to 7.5 percent from 7.9 percent.
“The global economy is in a very precarious state,” said Centaline’s Chan. “If he goes in hard at this point, it would be disastrous for the Hong Kong property market if the external environment suddenly deteriorates.”
With interest rates staying low, Leung will have to introduce more property curbs to rein in prices, according to K.W. Chau, the chair of the department of real estate and construction at the University of Hong Kong.
“Right now, he’s basically taking the same approach” as Tsang, said Chau. “For land and new apartments that are already included in the plan, it won’t change much even if you make them available sooner.”