Fourth tightening move in 2 years signals ongoing concern over surging prices

The Hong Kong Monetary Authority (HKMA) has ordered local banks to tighten down-payment ratios for home buyers for the fourth time in the past two years as well as raise the bar for overseas purchasers, intensifying a 20-month struggle to cool surging home prices and avert defaults on bank loans.

Buyers of homes costing more than HK$10 million will be required to increase up-front payments to 50 percent, it was announced on Friday. For properties valued between HK$7 million and HK$10 million, home buyers will have to pay 40 percent up front with the maximum loan amount capped at HK$5 million.

Buyers of properties valued below HK$7 million can still make a down-payment of 30 percent with the loan capped at HK$4.2 million.

The measures marked Hong Kong's fourth attempt since October 2009 to curb soaring home prices, rated by Savills Plc as the world's most expensive. Home prices have surged as much as 70 percent since the beginning of 2009 on record-low mortgage rates, an influx of mainland buyers and tight land supply.

Financial Secretary John Tsang said on Thursday in the Legislative Council that local home prices in the first four months of 2011 have registered a year-on-year jump of 11 percent. In April, the mass residential market already exceeded the historical 1997 peak level by 5 percent, while the luxury home sector is now 22 percent above its previous peak in 1997.

"By increasing the up-front payments of home buyers, the measures will increase the investment costs of property buyers and investors," HKMA Chief Executive Norman Chan told reporters on Friday, adding that the news measures were to take immediate effect. "They will also help the ability of local banks to withstand any potential mortgage loan defaults if the local home market exhibits a downward trend."

The HKMA also ordered local banks to raise down-payments for non-local residents for better risk management. Mortgage loan borrowers whose income is primarily from outside Hong Kong will need to make a higher down-payment of at least 10 percentage points regardless of property types or values. For those who secure their mortgage loans based on net worth rather than income streams, they will have to increase the down-payment to 60 percent.

"The local home market has been volatile and is being determined by various complex factors such as land supply, interest rate movement, global liquidity and income growth expectation. Although the property market cooled down a bit in March and April this year, there are now signs of renewed exuberance following high transaction prices recorded in recent government land sale auctions," HKMA's Chan cautioned at Friday's press briefing.

"The significant change is the new rule about overseas buyers since it's obviously targeting the mainland buyers," Eva Lee, analyst at Macquarie Securities Ltd, said in Hong Kong. "What it does is it may create a psychological impact on them: They may start expecting more measures to come that are targeting them."

The HKMA had already taken steps to tighten mortgage-lending standards three times previously since October 2009. The government on November 19 increased stamp duties on homes sold within six months of purchase and mandated higher down payments on properties costing HK$8 million or more.

He Guangbei, vice-chairman and chief executive of BOC Hong Kong (Holdings) Limited, said that although the HKMA measures would have an effect on the market it was still too early to "quantify the impact".

And Nicole Wong, regional head of property research at city-based investment bank CLSA, said she still forecast property prices to rise for the rest of this year albeit at a slower pace. "Mainland investors will still favor Hong Kong," Wong said. "They are not likely to be affected by mortgage tightening as many of them prefer to make a one-off full payment."

Bloomberg contributed to this story.

China Daily

(HK Edition 06/11/2011 page2)