Real Estate

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Hong Kong's de facto central bank is trying to manage the world's least affordable property market by taking banks to task for their easy lending practices. That won't work.

Real-estate prices in the city have soared to records despite numerous government curbs. None, including a particularly painful rise in stamp duty for foreigners and people who aren't first-time home buyers, have had much of an impact. Secondary sales volumes have decreased, but new dwellings are snapped up instantly, with purchasers getting around higher levies by buying several apartments in one go, and developers also lending a hand with generous incentives and discounts.

Out of Reach
Real estate prices in Hong Kong have kept surging even as the economy's growth has been stagnant
Source: Bloomberg
Normalized as of 1/4/2009.

Last year, Sun Hung Kai Properties Ltd. announced a mortgage offer at one of its projects worth as much as 120 percent of a home's value. Some developers, such as Li Ka-shing's Cheung Kong Property Holdings Ltd., own finance units that can help top up bank mortgages and circumnavigate loan-to-value ceilings.

Real-estate agencies, like Midland Realty and Centaline Property Agency Ltd., also have their own finance arms and have been offering zero down-payment plans to existing home owners. People who take up such offers often find themselves leveraged to the hilt. Interest rates of "prime minus 1" -- if you take HSBC Holdings Plc's 5 percent prime rate as a guide -- equate to a charge of 4 percent, versus the usual bank rate of 1.3 percent over one-month Hibor, which is currently 0.42 percent.

There's little the Hong Kong Monetary Authority can do. Finance companies are regulated by the Money Lender Ordinance, which is enforced by the Commissioner of Police. And in freewheeling Hong Kong, real estate developers aren't regulated at all.

Cash Rich
Some of Hong Kong's biggest developers, like Cheung Kong Property, actually have quite low leverage ratios
Source: Bloomberg

To top it off, the city's biggest developers are sitting on large cash piles, having, according to Bloomberg Intelligence analyst Patrick Wong, learned their lesson during the Asian financial crisis. Firms from the mainland do rely on high leverage, and take advantage of Hong Kong banks' low interest costs to make land purchases in the city, but it will be three to four years before apartments are built on those sites.

For now, the developers that dominate sales of finished apartments and the finance firms topping up people's mortgages have little standing in their way. This doesn't look like a war the HKMA can win.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net