Hong Kong Home Prices Have Much Further to Fall Before Controls Are Eased

Memo to Hong Kong developers calling for the government to ease property curbs amid a slump in home prices: Don’t hold your breath.

Declines in the residential property market have to get a lot worse before Hong Kong’s lawmakers would consider rolling back measures they introduced more than five years ago to rein in prices, according to eight analysts and economists polled by Bloomberg News. On average, they estimate that home prices, which have fallen 13 percent from a September peak, will have to plunge another 19 percent before the government intervenes.

A correction of that magnitude would be Hong Kong’s biggest since a six-year downturn that lasted until 2003 and would exceed declines during the 2008 global financial crisis. Still, officials may be willing to stomach such a historic slump because they’re more concerned with the widening wealth inequality that’s helped drive Chief Executive Leung Chun-ying’s popularity to a record low. Hong Kong ranks as the world’s least affordable housing market and Leung reiterated in May that prices remain too high.

"Any policy change has a policy risk," said Eva Lee, a UBS Group AG property analyst in Hong Kong. "If we are still in a low-interest rate environment, if they encourage investment demand, the market will get crazy."

Hong Kong’s de facto central bank and lawmakers in 2010 embarked on a plan to cool soaring property prices that had put home ownership beyond the reach of most people. The measures included higher minimum down-payment requirements on mortgages, taxes on non-resident homebuyers, so-called ad valorem taxes tied to a home’s value and a special levy for purchasers who flip properties within three years.

Together, these taxes can add as much as 42.5 percent to the cost of a HK$10 million ($1.3 million) home for non-resident buyers.

The property-market reversal drove residential transactions to a 25-year low in January and has squeezed profit margins at developers. The combined market value of Hong Kong’s five largest real estate companies has tumbled by HK$345 billion in the past year.

For Bloomberg Intelligence’s Primer on Pent-Up Home Demand, click here.

Amid the declines, developers and property agents have expressed hopes that regulators would ease property curbs. In March, Wheelock & Co. Chairman Douglas Woo called on the government to consider loosening. Executives from Cheung Kong Property Holdings Ltd. have also said they would like to see easing of mortgage controls or a reduction of stamp duties.

Bowing to property tycoons may have limited appeal in a city where the 10 richest people -- eight of whom have ties to real estate -- have combined net worth equal to an estimated 35 percent of the city’s economy. With elections for Hong Kong lawmakers looming in September, the government has to keep the rest of the voters in mind.

"It’s politically not viable for the government to lift the curbs because it will fuel political opposition," said Michael Davis, a law professor at the University of Hong Kong. "If they give this group the economic inequality argument on a silver platter by removing curbs, that will give the opposition credibility."

Hong Kong most recently tightened mortgage-to-value ratios in February 2015, to a maximum of 50 percent on properties worth more than HK$10 million. Raymond Yeung, senior economist at Australia & New Zealand Banking Group Ltd., said property developers hoping the Hong Kong Monetary Authority will ease limits on mortgage loan-to-value ratios will be disappointed.

Prices Still High

"They would like to hold macro prudential measures in place, as financial stability is the priority," said Yeung, who estimates prices need to fall another 30 percent to trigger any government action. "Prices are still high compared to 10 years ago."

One approach would be to increase the loan-to-value ratios at the bottom end of the property ladder while keeping them unchanged for more expensive purchases. ANZ’s Yeung says the HKMA is mindful that property developers have been aggressively offering second mortgages and even rebates on down payments, and so is unlikely to adjust loan-to-value limits across the board for fear of encouraging buyers to take on too much debt.

While negative equity levels -- where household mortgages exceed a property’s value -- pale in comparison with right after the 2003 SARS outbreak, they’ve been creeping up. The number of negative-equity mortgages jumped 15 times in the first quarter to 1,432, according to HKMA figures.

If the government does decide to cut stamp duties to fine-tune demand, adjusting the progressive ad valorem stamp duty may be the best route, according to Yeung. To make purchasing more affordable for those at the bottom end of the market, the government could reduce this tax while leaving it in place for pricier homes.

Still, some say any changes will have to wait. "I haven’t seen any indication they are saying the stamp duties will go," said David Ji, head of research and consultancy for greater China at Knight Frank LLP. "On the contrary, the government is still adamant."

Nicole Wong, head of property research at CLSA Ltd., said she isn’t convinced there’s any need for intervention, noting that the 5.4 percent decline since Dec. 31 is well short of her forecast of a 9 percent correction in the first six months of the year. She said the rapid declines between October and March were the result of panic selling by owners with unsold properties that had been on the market for a long time in anticipation of a major drop.

"We have digested that pent up supply and going forward prices will fall very slowly unless there is some kind of shock," she said.

Patrick Wong, Bloomberg Intelligence senior industry analyst for Asian real estate, agrees, noting that the increase in more affluent households will prevent prices from falling far enough to prompt government action. Last year, households with a monthly income above HK$50,000 increased by 50,300 while those below that level fell by 7,300.

"Curbs are unlikely to be removed," he said. "When the price is softening, there is some demand and people are thinking of the time to buy. The government will have to wait."