20 October 2016
The decline in home prices hasn't reached a level 'frightening' enough for the government to roll back its market-cooling measures. Photo: HKEJ
The decline in home prices hasn't reached a level 'frightening' enough for the government to roll back its market-cooling measures. Photo: HKEJ

Hong Kong govt may intervene if home prices plunge over 20%

Home prices in Hong Kong have started to fall again in the last two weeks, after stabilizing temporarily following the Lunar New Year holidays.

The market is closely watching whether the government will ease its tight grip over the housing market.

The Centa-City Leading Index of prices of used homes has tumbled 13.2 percent from the peak in last year’s third quarter to its lowest level since September 2014.

Lee Shau-kee, chairman of Henderson Land Development Co. Ltd. (00012.HK), said Monday the government will have to ease its tightening policy if home prices slump to “frightening levels”.

The government seems to have no problem with the decline in home prices so far.

Chief Executive Leung Chun-ying said early this week that the government has no intention to relax its tightening measures for the property market.

So, at which level will the government be “frightened” into relaxing those measures?

Since the 1980s, the bust cycle in the housing market has usually lasted about six years.

For example, the last bear cycle in the property market lasted from 1997 to 2003.

There are usually three types of correction in the six-year housing market downturn.

First, a modest correction of up to 5 percent, like the ones in 1989 and 2011/12.

Second, a medium-size drop of 15-18 percent, as in 2008/09 and 1994/95.

Third, a massive fall of over 60 percent, as in 1981-1984 and 1997-2003.

It remains unclear whether the recent correction belongs to the second type.

However, it’s quite likely that the city’s housing market will enter a bear market if the price falls exceed 20 percent.

By then, the government will be discussing how to rescue the market from a collapse rather than whether to reduce its tightening measures.

So, it’s quite likely that the government may step in if home prices decline more than 20 percent.

A 20 percent correction would drive home prices back to their levels in 2013 and 2014, when the market was consolidating. That will be a key support level.

If home prices break below those levels, we might see more dramatic falls.

Most mortgage insurance policies cover up to about 80 percent of the price of homes worth below HK$6 million.

The mortgage loan portfolio of banks may deteriorate quickly if home prices drop more than 20 percent.

By then, the Hong Kong Monetary Authority would be obliged to change its countercyclical measures.

Also, that degree of price decline would mean homebuyers who bought their homes around 2012 would book losses.

That would affect a large number of homeowners, as well as banks’ asset quality.

This article appeared in the Hong Kong Economic Journal on March 24.

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]


Hong Kong Economic Journal chief economist and strategist

EJI Weekly Newsletter