Counter-cyclical Measures By The HKMAOn Friday, the 27th of February, Celeste was looking at a flat in Wanchai. She’s been in the market for a home for several years, and thought before things got even harder, she’d scrimp and save for 30 percent. As she was investigating the bathroom, her agent read an alert he just received: Loan to value ratios went down to 60 percent half an hour earlier he told her. Back to square one.

The Impossible Dream
That was a scenario that was probably playing out all across Hong Kong a few weeks back, when the Hong Kong Monetary Authority opted to protect the banks (HSBC, after all, needs to have some cash on hand to pay the fines it’s likely to get for helping wealthy clients dodge taxes, and yes we all know it’s a “separate” bank) instead of finding ways to assist home buyers. Monetary Authority Chief Executive Norman Chan said, “The HKMA has decided to introduce three additional counter-cyclical measures in order to safeguard banking and financial stability.” Chief among the three is the requirement for a 40 percent down payment for properties valued below $7 million across the board. The maximum debt-servicing ratio (DSR) for second residential properties (for self-use) also dropped to 40 percent and the stressed-DSR cap to 50 percent. Chan admitted the new measures would affect first-time homebuyers — precisely the market looking at properties below $7 million — but stressed it is the MA’s “duty” to ensure monetary stability.

Reaction has been fairly swift. Newspapers have been quick to report on the dashed hopes of young couples and single professionals like Celeste. While the HK Mortgage Corporation is still around to lend a hand (its Mortgage Insurance Programme now covers 80 percent of the loan-to-value) that still puts her at least two years away from a home — assuming prices don’t go up again turning her $5 million budget to $6. And adding another year.

Will this stop the upward cycle and control prices without killing the market? Time will tell but Denis Ma, head of research at JLL, commented, “These new measures are likely to dampen sentiment and put pressure on prices over the short-term but a sharp correction is unlikely given the strong underlying fundamentals in the market — pent-up demand via sturdy household formation, robust labour market and steady household income growth.” Ma’s thinking is that the primary market is more likely to be affected, as motivation to sell for investors remains low. Leasing demand is steady but could rise after this news. Which in turn makes it hard to save $2 million in a rent control-free city, but that’s another story.

David Ji, director and head of research and consultancy, Greater China at Knight Frank, agrees about the measures’ impact on sentiment. “The new cooling measures have indicated the government’s efforts to curb the red-hot small to medium-sized residential sales market. Buying sentiment will be affected in the short-term with reduced affordability of buyers and transaction volume is likely to decrease,” he theorises. With an additional 10 percent needed, prices are unlikely to drop significantly with demand still so strong. Adds Charles Chan, managing director of valuation and professional services at Savills, “[The measures] drive purchasing power from second hand market to first hand market, as developers can provide incentives to counter-balance effect of the cooling measure.”

Cosying up to Wall Street?
Perhaps more than anything, the image the HKMA projected with its announcement was that the banks were more important than everybody else. Add to that the wide belief speculation drives prices up, and the whole exercise seems like a slap in the face to average Hongkongers. Ji doesn’t see it that way. “Residential prices, especially those of small to medium-sized flats, have surged since the relaxation of Double Stamp Duty in May last year. Meanwhile, the potential US interest-rate hike could have significant impact on the local property market,” he explains. The new measures will impact some end-users and first-timers, however, “The government’s new policies aim to remind prospective buyers to take into account relevant risks, amid possible signs of an overheated property market.” And speculation is less of an issue than is perceived. “The number of transactions reduced significantly since introduction of the cooling measures,” states Savills’ Chan, further theorising, “Perhaps the government has no other means to suppress demand.”

In many ways it makes sense to target the market’s hottest sector: the luxury market has chilled significantly since the introduction of various steep stamp duties. But Colliers International believes there may be method to the HKMA’s madness. Undercurrents of economic uncertainty, continued rising prices (for private and public homes) and warnings of interest rate hikes demanded action for the government to demonstrate a commitment to cooling the market. Colliers also agreed about the who would be affected, but pointed out the HKMA’s prior mortgage tightening moves had only a short-lived impact and property prices still continued to spiral up. “All these administrative measures have distorted the market by reducing supply in the secondary market and strengthened demand for smaller apartments,” the advisory said in a statement. The solution to all this, of course, is to increase supply.

Colliers’ research predicted developers would ultimately weather the negative sentiment storm, estimating potential buyers would indeed qualify for second mortgages and they would continue top-up financing for those entering the market. As Savill’s Chan noted, focus in the immediate future will remain on primary sales, though price cuts are unlikely. Earlier borrowing curbs have indeed removed weak buyers from the market, and interest rate hikes shouldn’t pose a serious threat to the housing market overall under the circumstances the government and the HKMA have created. Colliers: “This time round the impact will be smaller than the period after the implementation of [DSD] in February 2013, in which the low transaction volume lasted for 12 months. Prices in the secondary market will stay at the current level instead of experiencing a drastic decline.”