Rebound puts more flats out of reach for first-time homebuyers

May 02, 2019 12:27
Hong Kong’s housing boom has lasted more than a decade. The  duration of the rally and the degree of price jump have both exceeded the expectations of most people. Photo: Reuters

Hong Kong’s housing market has rebounded much faster than most have expected.

As the supply of flats priced under HK$6 million continues to dry up, owning a home has increasingly become a remote dream for many Hongkongers given the substantial down payment needed.

There is a huge difference between the affordability of a home selling at or under HK$6 million and one above this threshold.

For an apartment priced at HK$6 million, buyers can get a maximum 80 percent mortgage. So they need to have HK$1.2 million plus taxes and fees, totally around HK$1.5 million.

For a HK$6.5 million property, buyers are subject to a 60 percent loan to value ratio (LTV) cap, meaning they need to prepare HK$2.6 million plus taxes and other expenses, totally around HK$3 million, a sum most young Hongkongers cannot fork out.

Since 2009, the Hong Kong Monetary Authority(HKMA) has introduced eight rounds of countercyclical measures to tame the housing market. These basically involve two key measures, lowering the LTV cap and tightening the stress test of mortgage serving ability.

In the 1980s and 1990s, most homebuyers could borrow up to 95 percent of the property value. The ratio came down to 80-90 percent afterwards. Now, homebuyers can only obtain 60 percent mortgage loan for real estate costing above HK$6 million and 50 percent for those above HK$10 million.

The Monetary Authority's main concern is about safeguarding the stability of Hong Kong’s financial system. It wants to make sure only those who are financially sound can get loans from banks, in order to prevent financial risks should housing prices collapse.

To give first-time buyers an option, Hong Kong Mortgage Corporation (HKMC) has introduced the Mortgage Insurance Programme (“MIP").

For a fee charged to buyers, the MIP provides mortgage insurance to banks, and banks can then provide a mortgage loan of up to 80 percent LTV ratio under the MIP for property transactions at or under HK$6 million. ( A 90 percent LTV ratio applies to properties under HK$4 million.)

Using this insurance service, homebuyers would only need to come up with 20 percent of the property transaction price as down payment, which can greatly reduce the initial lump-sum requirement.

This is part of the reason why homebuyers quickly snapped up flats under HK$6 million during the previous round of correction.

But there are very few such listings now, not to mention properties under HK$4 million.

The current round of housing price rally started in 2003, and the length and price jump have persistently exceeded the expectations of most people.

Whenever there was a correction, it was always a brief one.

This article appeared in the Hong Kong Economic Journal on April 30

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist