High mortgage rate is a catalyst for rising home prices

House Price Increase

While the Hong Kong government is leaving no stone unturned to try to rein in home prices, it did little to deter buyers, who are still lining up outside sales offices of new developments with cash in hand. Interestingly at the same time, the secondary market is stuck in stagnancy. Even the “Top 10 Housing Estates”, a usual indicator of the secondary market sales, had only a few transactions during weekends and on other traditionally popular dates. The only second-hand developments with decent sales records have been low-end estates.

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So why have buyers preferred new developments recently? On June 2, Anthony Cheung Bing-leung, Secretary for Transport and Housing, dropped a bombshell of a fact on us: first-time buyers accounted for a staggering 94% of all property buyers in the first quarter of this year.

To explain this phenomenon, I have to go back to the definition of first-time buyers. They refer to Hong Kong permanent residents who are buying real estate for the first time, and they include those who have previously sold all their properties.

According to current regulations, first-time buyers can get a mortgage rate as high as 90% when purchasing homes that are HKD$4 million or less, or an 80% mortgage rate for houses selling for less than HKD$6 million. For those capable of purchasing HKD$10 million homes, they can also get a mortgage of up to HKD$5 million, or a 60% mortgage rate. Second mortgages are not included in these policies, and mortgage regulations have the same restrictive effect on both primary and secondary markets. However, the recent waves of rising home prices have almost wiped out old and poorly maintained HKD$4 million units in town, while the government’s “spicy measures” have made home owners extremely reluctant to sell. At present, a typical second-hand two-bedroom unit starts at around HKD$5.5 million. It can easily be HKD$2 million or more in cash for first-time buyers to prepare for the down payment and other necessary expenditures.

There is no wonder, therefore, that clever developers have found ways to bypass mortgage restrictions. Most new developments are offering 85% high mortgage rate - a huge financial relief for buyers, and as a result, these units are wildly popular despite increased prices. In addition, developers are also offering stamp duty rebate, and the new units come with brand new appliances and interior décor. Given all the benefits of new units and the lack of good second-hand options, first-time buyers looking for smaller down payments are rushing to the primary market despite the higher overall prices.

Surprisingly, the sold-out success of these new developments also give buyers the illusion that these units are of great value, missing the fact that it is actually the result of developers setting extremely high mortgage rates as an effort to attract first-time buyers. My prediction is that even if the government introduces more draconian housing market restrictions, as long as they allow such high mortgage rates to exist, Hong Kong’s home prices will continue to rise at a steady pace.

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