Home in a jam

Hong Kong's property sector is set to be in for a bumpy ride for the rest of the year despite hopes it would gain from the easing of the loan-to-value ratio for residential homes. Experts have warned that rising interest rates, tepid buyer sentiment and weak economic recovery may constrain the market. Oswald Chan reports from Hong Kong.

The Hong Kong Monetary Authority — the city's banking industry regulator — last month raised the maximum loan-to-value ratio for (self-use) residential homes from 50 percent to 70 percent for properties valued at HK$15 million ($1.92 million) or less, and from 50 percent to 60 percent for apartments worth between HK$15 million and HK$30 million. For properties valued above HK$30 million, the ratio remains unchanged at 50 percent.

Analysts with global real-estate consultant firms are split over which direction the market might be headed, and how these measures would affect the city's housing sector.

"The recent LTV (ratio) relaxation, along with Hong Kong's improving economy, are set to support investment sentiment and the transaction volume in the residential property sector," said Eddie Kwok Wai-yan, senior director at CBRE Hong Kong valuation and advisory services. "An additional 20 percent LTV ratio relaxation may prompt homeowners to consider refinancing their properties. It may also push buyers intending to switch to larger units to enter the market."

Kwok believes developers whose residential apartments are priced between HK$10 million and HK$15 million would benefit the most, and they are likely to take this opportunity to launch more of these projects to reduce inventory.

"Easing the LTV ratio can effectively help homeowners who intend to change apartments. Developers have recently put on sale new projects with mainly two or three-bedroom units to attract such clients. Mid-to-upper range properties priced at HK$10 million to HK$30 million will be in demand," says Eric Tso Tak-ming, chief vice-president of mReferral Mortgage Brokerage Services.

Other analysts choose to stay on the other side of the fence, saying the relaxation measures will not have much effect on the overall residential transaction volume and prices.

Joseph Tsang Hon-ping, chairman at Jones Lang LaSalle in Hong Kong, explains: "Although easing the LTV ratio for self-occupied homes is a move in the right direction and will benefit the property sector, current high interest rates and a weak economy will not help lighten the housing mortgage burden on homebuyers."

He notes that 80 percent of residential property transactions in Hong Kong involve homes valued at below HK$10 million. So, soothing the mortgage ratio will not have much of an impact on the overall residential transaction volume and market prices. "The government should remove its cooling measures, particularly those relating to stamp duties, and scrap the mortgage stress test to give banks greater flexibility in assessing the mortgage loan risk."

Cushman & Wakefield's Greater China Vice-President and Greater China Head of Consulting Alva To Yu-hung agrees. "Hong Kong's pace of economic recovery in the past few months has not proceeded as expected. The government should fine-tune policies to support residents changing flats before the situation gets worse."

Cushman & Wakefield wants the ad valorem stamp duty to be optimized to alleviate the financial pressure on homeowners when changing flats. "We do not think the government needs to worry this would cause a sharp rise in local property prices," says To.

The Hong Kong Special Administrative Region government has introduced successive rounds of measures to cool the property market since 2010 to reduce short-term speculative activities by deterring nonlocal and investment demand for properties. The steps taken have included introducing a special stamp duty in November 2010; a buyer's stamp duty in October 2012; a doubled ad valorem stamp duty in February 2013; as well as a new residential stamp duty in November 2016.

The HKMA has also initiated several rounds of macroprudential measures since 2009 to reduce possible risks of financial instability arising from an overheated property market. The key steps involved the gradual lowering of the caps on the LTV and debt servicing ratios, and extending the additional prudential measure of further cuts in the LTV ratio cap for luxury homes and investment properties.

'Wait-and-see attitude'e

Looking ahead, Hong Kong's residential property price trend is likely to be constrained by various factors, such as market sentiment, long-term housing supply, interest-rate movements and the city's economic growth prospects.

Derek Chan Hoi-chiu, head of research at Ricacorp Properties, describes sentiment in the local homes market as sluggish, saying prices are likely to be subdued in the second half of this year. This is because buyers and sellers have their own interpretations of the HKMA's relaxation of loan mortgage ratios, as well as interest-rate hikes. Prospective buyers remain cautious about entering the market, while secondhand owners have strong holding power, and are not too pessimistic about the market outlook. As a result, these owners rarely offer huge price cuts, thus making transactions sluggish in the secondhand sales market.

"As owners are not willing to slash prices easily, secondhand transactions have stalemated, while the United States and Hong Kong raised interest rates again at the end of last month," notes Chan. "Potential buyers are worried about higher interest rates, forcing them to adopt a wait-and-see attitude."

Hong Kong recorded 3,065 sale and purchase agreements for residential units in July, representing a month-on-month decrease of 15.2 percent and an annual decline of 16.5 percent, according to the Land Registry. The total consideration for sale and purchase agreements in respect of residential units in the same month was HK$26.6 billion, registering a month-on-month decrease of 20.9 percent and a decrease of 21.5 percent from the previous year.

The Hong Kong home price index tracked by the Rating and Valuation Department showed that home prices in June fell by almost 8.6 percent year-on-year. But in the first half of this year, private home prices rose by about 4.3 percent compared to year-end of 2022, after having tumbled more than 15 percent last year.

A new residential project launched by tycoon Li Ka-shing's property flagship CK Asset Holdings, offering the lowest prices in seven years, has shocked the market and could intensify a price war in the financial hub. The company offered brand-new apartments at its Coast Line II project in Yau Tong at prices that were as much as 20 percent cheaper than those of the most recent luxury housing projects launched in the area. This induced homebuyers to snap up new flats at Coast Line II, betting that Li's reading of the slumping property market is correct.

"We have adjusted our forecast for the year-on-year increase in small and medium-sized home prices to between 1 and 4 percent. This could see residential prices reverse their positive first-half trend and decline in the second half. Secondary home prices will also gradually be adjusted to get transactions completed," predicts Dorothy Chow Yeuk-yu, executive director at Colliers Hong Kong's Asia Valuation and Advisory Services.

However, she believes that the expected influx of people into Hong Kong under the city's various talent recruitment programs may push up demand to a certain extent amid the downward price pressure caused by sellers eager to move out of Hong Kong, especially in the second and third quarters.

The second constraining factor is the problem of long-term housing supply that may put a brake on the city's sizzling home prices.

Bloomberg Intelligence expects local property prices to retreat further from 2023 to 2025 as an expected surge in supply may force developers to make concessions. Hong Kong's private home market might well see a property glut in the next three years that would cause prices to buckle.

Citing an Our Hong Kong Foundation figure, Bloomberg Intelligence expects an annual average of about 20,200 private residential units to be completed between 2023 and 2025, with peak completion of about 20,900 units in 2025. But those figures could fall to about 18,700 in 2026, and to 15,500 in 2027.

The number of private homes completed in 2022 surged to 21,168 units, against an annual average of 11,600 from 2007 to 2017. Centaline Property's secondary home price index saw a gain of only 1.1 percent as of June 6 since year-end 2017, while it had skyrocketed 206 percent from 2007 to 2017, according to Bloomberg Intelligence.

A spreading impact

Hong Kong's property market has to be prepared for a bumpy ride as interest rates continue to mount.

"Higher interest rates might weaken the bargaining power of both secondary homeowners and developers, especially those with high leverage and sizable maturing debt. Major developers might need to lower their prices to boost sales as potential buyers might get nervous about a potential uptick in Hong Kong mortgage rates in the next few months," warns Bloomberg Intelligence.

"Hong Kong's mass residential prices could fall by about 5 percent in the second half of this year due to possible mortgage rate hikes. The first rise in mortgage rates since June 2022 has weakened both investment and end-user demand for private residential units," Bloomberg Intelligence says.

Tsang agrees. He believes that rising mortgage rates will continue to depress the residential sales market, and expects the capital value of mass residential flats to drop by 5 to 10 percent in the second half of this year, and prices of luxury units to fall by up to 5 percent.

Major Hong Kong banks raised their lending and saving deposit rates at the end of last month after the US central bank upped interest rates for the 11th consecutive time since March last year. The Federal Reserve announced a rate hike of 25 basis points, raising the target range for the federal funds rate to 5.25 to 5.5 percent. The HKMA raised its base rate upward to 5.75 percent following the US rate increase.

The uncertain post-COVID economic outlook for Hong Kong, as well as the local stock market's tepid performance, also creates headwinds for the property sector.

"Whether property prices will keep rising will depend largely on the trajectory of interest rates and the stock market's outlook. It is worth noting that Hong Kong's real-estate market always takes its cue from the Hang Seng Index," notes Kathy Lee Yuen-yan, head of research at Colliers Hong Kong.

The SAR's revised GDP growth rate for the second quarter of this year slowed to 1.5 percent, compared with the previous quarter's 2.9 percent, indicating the city's economic rebound following the pandemic has not been as strong as anticipated.

It had been projected that Hong Kong's property market would benefit from the scrapping of its stringent anti-COVID measures, and the normalization of travel between the SAR and the Chinese mainland, leading to a strong rebound in the city's economy and a recovery in its initial public offerings market as the interest-rate hike cycle was expected to end late this year.

"Surging interest rates, a volatile stock market, a challenging external economic environment and the declining number of births and marriages have all affected housing demand," says Tsang.

A weaker-than-expected economic recovery on the mainland has had a limited spillover effect on Hong Kong's housing market as fewer mainland people have been snapping up properties in the city in the aftermath of the pandemic.

Contact the writer at oswald@chinadailyhk.com