What's the thinking behind HK's new housing policy?

October 18, 2019 12:55
Hong Kong’s new property measures, which include eased mortgage rules, have been met with mixed reaction as to their possible consequences. Photo: Bloomberg

In her third annual policy address (delivered remotely via video telecast, which is a first in the history of the city) on Wednesday, Hong Kong’s leader Carrie Lam Cheng Yuet-ngor focused on solving the housing crisis by raising the mortgage cap for first-time buyers, among other measures.

But the move has sparked mixed reactions across the city.

Under the new measure, the government-backed Hong Kong Mortgage Corporation will relax the ceiling on mortgage financing schemes for first-home buyers. Purchasers will be able to borrow up to 90 percent of a property’s value to a maximum of HK$8 million, from HK$4 million previously.

Lam said the new measure is aimed at helping young professionals who have monthly salaries in the tens of thousands but are unable to buy flats because of the huge down-payments required amid the high property prices.

Hong Kong is one of the most unaffordable property markets in the world, but in recent months prices have begun to weaken as a result of slowing global economic growth and ongoing social unrest in the city.

There are significantly more listings of flats offered at the lower end of the price spectrum. For those who had been planning to buy their own homes, they now certainly have more choices.

Amid this, the government has announced that first-time homebuyers will be excluded from the mortgage stress test (a financial stress test which prospective homebuyers must pass in order to qualify for a mortgage from banks), and be eligible for up to 90 percent of loans, subject to an additional 15 percent premium for mortgage insurance.

That marks a complete U-turn against the government’s tough stance earlier on the stress test for fear of potential financial risks.

Under the new rule, for a buyer of an HK$8 million home, with a 90 percent mortgage, the initial down-payment will fall to HK$800,000, compared with HK$2.4 million previously. Nevertheless, the monthly repayment will rise to HK$29,000, based on an effective mortgage rate of 2.6 percent on a 30-year loan. Considering a debt-to-income ratio of 50 percent, the buyer should have monthly income of no less than HK$58,000.

But with a 90 percent mortgage, the buyer would face a risk of the home turning into negative equity, if housing prices slump by over 10 percent. In an economic downturn -- Hong Kong is heading for a recession this year, economists have warned -- the buyer may land in a serious financial mess if the person loses his or her job or faces a salary cut.

Lam said her policy address won’t be able to resolve the impasse that Hong Kong is facing, but the measures to relax mortgage rules may in some way help in moving toward that goal.

But think of this: Those who would take the risk to purchase an HK$8 million or an HK$10 million property with such a high ratio despite the recent social turmoil, they ought to have the utmost confidence in the macro outlook, something that is open to question given the current situation.

As for the middle-class folks in the city who have lost faith in the government and are considering moving elsewhere, they could find it easier to find buyers for their properties under the new measures, which could encourage them to press ahead with their emigration plans.

Amid this potential scenario, will the new measures have an unspoken consequence?

Let’s make a bold speculation. In order to make sure that there are sufficient prospective buyers to take over the properties sold by the disappointed Hong Kong middle class, the government might introduce measures to reduce extra stamp duty for non-local buyers, or resume the investment visa scheme, encouraging mainlanders to buy flats and settle down in Hong Kong.

For now, mainlanders may have little interest in moving to Hong Kong given the ongoing social turmoil in the city. But they may come back once things settle down.

Think again, what is the real purpose behind Carrie Lam's new housing policy?

This article appeared in the Hong Kong Economic Journal on Oct 17

Translation by Julie Zhu with additional reporting

[Chinese version 中文版]

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Hong Kong Economic Journal columnist