How to Protect Your Down Payment from Forfeiture

According to data from most major brokerages, Hong Kong’s sagging residential sales sector regained some of its mojo this past July and August, with sales spiking in the luxury sector (which had previously been stagnant) as well as in mass residential due to aggressive developers trying to move product.

But 30% of Hong Kong’s residential sales still come from the second-hand market, and that can be harrowing for some buyers.

Yes, we should all budget for what we can afford, but Hong Kong’s down payment structure can create a catch-22 that often requires heading to the second-hand market – where bigger down payments can be required or financing is simply unavailable. It makes what should be the dream of owning a home into a pipe dream.

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Down payment demands for property vary from market to market, no two of which are identical; they are a reflection of each. In the US and Canada, deposits usually average roughly 10% to 20%. In the UK, the figure works out to about 25%. Singapore sits at 20% and Australia can be as low as 5%. Japan asks 10% to 20% for residents. As has been well-documented, Hong Kong currently requires 40% to 50% (developer incentives aside) from middle-class buyers, putting it among the highest in the world.

When the Hong Kong Monetary Authority implemented the last round of cooling measures, its stated purpose was to protect the banks.

Bringing skyrocketing home prices under control was almost an afterthought. The plan worked, effectively locking a huge swathe of Hongkongers out of the mortgage game.

So unless you’re rich enough for the banks or you don’t have a conventional job they understand, it’s best to resign yourself to life as a tenant.

“Most buyers nowadays are financially strong as the tough borrowing measures implemented from day one have removed all the weak buyers,” from the lending pool theorises Colliers International’s Daniel Shih, director of research and advisory.

At current down payment rates, the deposit requirement for homes up to $7 million totals $2.8 million ($5 million for a $10 million home).

But fail to qualify for financing – the step that comes after paying a deposit – and potential buyers can kiss that money goodbye; forfeit is still industry standard.

David Ji, Knight Frank’s director and head of research and consultancy in Greater China, suggests the onus is on the purchaser to protect themselves.

“Potential buyers should do more research to avoid bank devaluation. They should also budget for more, leaving a buffer for future interest rate hikes, and make sure they can pass the stress test before committing to a purchase,” he says.

Change of Heart

With the responsibility on buyers to ensure they qualify for mortgages – admittedly a reasonable concept as basic economics recommends not spending more than is earned – there is no reason to demand a change in banking or sales transaction policies.

However, Lucy, a web publisher and small business owner, is one of those that could be left out in the cold. She was considering her first flat just after the DSD was implemented, and collated some tax returns and audits to see if she would quality.

“My income for seven years running was over $600,000 after taxes, and my business revenue had grown each year for the previous five,” she recalls.

Assuming that was enough to get her a mortgage, she began investigating modest flats at a price point she was confident she could afford.

“Hardly any banks would give me any positive feedback on the probability of qualifying for financing. And the single one that said my income was good enough didn’t like the fact I had come to them with a walk-up unit. They said the building was too old. Basically they said I had to move into what I consider a bland, characterless skyscraper.”

That room for some buyers to avoid losing millions of dollars can potentially be addressed in provisional purchase agreements, but could reforms be an option?

Hong Kong is finally in the process of streamlining its title registry, so anything is possible. Shih doesn’t think so.

“We do not foresee the government will [effect] any changes in financing policy in the near future,” he says of any potential to revamp the current down payment system.

Ji agrees, arguing that refunds and even a third party escrow system – where an independent party holds deposits until financing is secured and transactions are complete, paying out or returning them depending on the result – is a long shot.

“This is unlikely for Hong Kong, and in fact it is not very common elsewhere, because this would disrupt market trading mechanisms,” he states.

“Developers and landlords may push up prices when they learn that the government will take up the properties anyway and purchasers could commit to purchases which they are not sure they can afford.”

In January, Raymond Ngai, head of property research for the Bank of America Merrill Lynch, told The Straits Times in Singapore, that if prices continued to fall, the HKMA would likely relax the restrictive deposit demands.

“I don’t think we need to pay a 40 or 50 per cent down payment if prices correct 10 or 15 per cent. Banks are very safe with loan-to-value ratios,” Ngai theorised, predicting down payments could fall back to their original levels.

As of July, home prices had fallen 10% from their September 2015 peaks. There’s no end in sight yet.