Implications of recent relaxation to Hong Kong’s mortgage rules

February 3, 2020 / By  

Since 2010, the government has been implementing a series of demand-controlling measures, such as tightening loan-to-value (LTV) ratios and introducing different stamp duties, to cool down the housing market in Hong Kong. According to figures released from the Land Registry, these policies have led to a notable fall in residential transaction volumes, from a monthly average of about 11,300 in 2010 to just 5,000 in 2019.

These demand-controlling measures, together with the consistent rise in housing prices over the years, have pushed potential buyers, particularly first-time buyers, towards the primary market. As a result, the proportion of secondary home sales, out of the total, dropped to 64%, compared to 90% back in 2010. Potential buyers with insufficient funds for the down payment, generally, have no option but to go to the primary market since many developers offer additional financing incentives to lure buyers and boost sales.

Figure 1: Primary vs Secondary Home Sales Volumes (2007-2019)

Source: Land Registry, JLL

However, in its latest policy address, the Government has relaxed the cap for LTV ratios up to 90%; increasing the maximum property value from HKD 4 million to HKD 8 million, to help first-time buyers. In addition, for both first-time homebuyers and upgraders, the cap is moved from HKD 6 million to HKD 10 million for a maximum cover of 80% LTV.

The new measures will help to open up the secondary market for first-time homebuyers, as the required down payment is substantially lower. Besides, we expect to see a change in buyers’ appetite with the increased affordability. According to figures from Economic Policy Research Centre (EPRC), transaction volumes of private residential properties below HKD 4 million, out of the total, have decreased to just 8% in November, compared to the 2019 average of 11%. Meanwhile, the sales for properties priced between HKD 4-10 million has gone up to 77% in November compared to 68%, the monthly average of January to October 2019.

On the other hand, developers who wish to offload inventory, ahead of the implementation of vacancy tax, are likely to keep asking prices more reasonable with the increased competition from the reactivated secondary market. This will likely result in a narrowing price gap between the primary and secondary market. Going forward, developers are likely to build relatively larger units and set property prices between HKD 4-10 million to adapt to the change in buyers’ preference.

Even though we believe the relaxation of the LTV cap is the right initiative to help improve buyer’s access to the secondary market, the timing of its implementation is questionable. Hong Kong has officially entered into a technical recession in 3Q19, which means the labour market is likely to weaken over the next year or so. Encouraging purchasers to take on additional debt does pose a risk during a period when unemployment is likely to rise and could lead to higher default rates.

Looking forward, the relaxation in mortgage rules together with lower interest rates should have a positive effect on the market. However, we maintain our view that the overall market outlook remains dim. Additionally, we expect overall housing prices to fall by 10 to 15% in 2020.

Over the short-to-medium term, a combination of the weakened domestic sentiment, a rise of new launches from the implementation of the vacancy tax, the ongoing political protests as well as the current coronavirus situation, will ultimately offset any benefits from the rise in LTV cap.

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