Beyond limits

Despite the various prior government measures to dampen Hong Kong’s property market, the property prices have surged considerably since 2009 and the overall prices have passed the 1997 peak. Buying a modest home in Hong Kong is now generally being considered as beyond the means of most Hong Kong people.

Government to offer eight sites to ease land concerns

To cool the property market and the sky-rocketing property market prices, recently the government announced the launch of eight sites for sale between July and September (by tender and auction) in an attempt to increase the land supply. These eight sites in total are expected to offer about 6,000 residential flats, doubling the estimated 3,000 flats provided by the nine residential sites put up for sale in April to June this year.  Furthermore, in order to ensure those flats would be built to meet the demand of the mass public, the government also imposed some extra requirements on developers for the development of the above sites (such as requiring the developers to build a minimum number of flats or to supply certain amount of small and medium-sized units on particular sites).

Simultaneously, the above measures coincided with another round of mortgage tightening measures from the Hong Kong Monetary Authority (the “HKMA”) which aim to prevent banks and financial institutions from over lending, and that is the fourth time the HKMA has tightened up mortgage policies ever since October 2009. While all the previous measures were mainly focused on the luxury end of the property market, this time the measures have expanded to lower-priced properties and “foreign” purchasers. Such tightening policies come seven months after the government has announced the imposition of Special Stamp Duty on residential properties, under which special stamp duty at 5% to 15% of the purchase price would be payable if a property is resold within 6 months to 24 months after acquisition.

HKMA puts new limits on residential mortgages

As a brief summary of the above new measures, the HKMA has tightened the loan-to-value (LTV) ratio of mortgage lending for properties above the price level of HK$7 million and, for the first time, imposed extra restrictions on mortgages to non-resident borrowers, including purchasers from the mainland:-

1.            First, the maximum LTV ratio for residential properties with a value between HK$10 million and HK$12 million will be lowered to 50%.  In other words, the 50% maximum LTV ratio introduced in November 2010 will be applicable to all residential properties with a value of HK$10 million or above;

2.            secondly, the maximum LTV ratio for residential properties with a value between HK$7 million and HK$10 million will be lowered to 60%, with the maximum mortgage loan amount capped at HK$5 million;

3.            thirdly, for those properties valued below HK$7 million, the maximum LTV ratio remains at 70%, but a new cap of HK$4.2 million will be added, effectively meaning only properties below HK$6 million are not affected;

4.            fourthly, for borrowers who do not have stable income but only have assets, their maximum LTV ratio will be reduced to 40% from 50%;

5.            last but not least, new and tougher restrictions will also be added on non-resident borrowers (i.e. the mortgage loan applicants whose principal incomes are not derived from Hong Kong) such that the maximum LTV ratio they could be offered for all mortgages (including residential, offices, commercial property and regardless of the property values) will be reduced by at least 10% points. Waivers of these restrictions can only be given if borrowers are transferred by their employers to Hong Kong or if their parents, spouses or children live in Hong Kong.

The above HKMA measures took effect on 10 June 2011.  However, any loan applications in respect of property transactions with provisional sale and purchase agreements signed on or before 10 June would not be affected. 

Conclusion

By increasing the land supply and strengthening the risk management of the banking mortgage system, the government has demonstrated its effort and commitment to stabilize the Hong Kong property market. That being the case, however, while increasing land supply will help to cool the red hot property market, since the flats would not be available for at least two to three years, such measures would not have immediate effect on the property market prices. Furthermore, it is suggested that limiting the non-local and mainland purchasers to buy Hong Kong properties by imposing additional mortgage constraints would give the impression that the government is making unnecessary discrimination. Any plans to restrict foreign or mainland people from buying properties in Hong Kong should be thoroughly considered before putting them into real measures.