HK Takes Measures To Stabilise Property Market

by Mary Swire, LawAndTax-News.com, Hong Kong

17 August 2010

Hong Kong’s Financial Secretary, John Tsang, has said that, despite the controls introduced in the budget in February this year, property prices have continued to rise due to external factors, and additional measures are therefore required.

Average flat prices in Hong Kong are now 15% higher than the previous peak in 2008. Although prices overall are still 16% below those in 1997, flat prices at some popular housing developments are fast approaching historical highs.

Additionally, he said, the mortgage repayment to household income ratio rose to 41.5% in the second quarter of this year. Although this is still lower than the 1989-2008 20-year average of 53%, there is increased risk of a property bubble forming because interest rates are expected to continue to be very low for some time to come.

While the supply of flats is to be increased by the release of additional plots of land, and the government will also look at planning applications, lease modifications, land exchange, property development along railway lines and urban redevelopment, the government is also determined to curb speculative property market activities.

The Lands Department will disallow confirmor transactions of first-hand uncompleted flats which are granted pre-sale consent by the department on or after August 13. In other words, purchasers of those flats will not be allowed to re-sell, sub-sell or transfer the benefits of the agreements for sale and purchase before completion of the transaction. The Department will also require that buyers of those flats forfeit 10%, instead of the current 5%, of the total purchase price if they cancel the transactions.

Furthermore, so as to prevent excessive expansion in mortgage lending, the Hong Kong Monetary Authority (HKMA) has been monitoring closely the financial stability risk relating to the residential mortgage lending portfolio of the banking sector. It has therefore announced additional measures to ensure that the risk-management practices adopted by banks in granting residential mortgage loans will remain prudent and appropriate.

The HKMA has issued a circular to banks in Hong Kong requiring them to apply a maximum loan-to-value (LTV) ratio of 60% to properties with a value at or above HKD12m (USD1.5m). For properties valued below HKD12m, the 70% LTV guideline will continue to apply, but the maximum loan amount will be capped at HKD7.2m.

It has also lowered the maximum LTV ratio for properties which are not intended to be occupied by the owners to 60%, and standardized the limit on debt servicing ratios (DSRs) of mortgage applicants to 50%, instead of the current range of 50% to 60%. In addition, banks should stress-test mortgage applicants' repayment ability assuming an increase in mortgage rates of at least 2%, and limit the stressed DSR to a cap of 60%.

At the same time, the Hong Kong Mortgage Corporation Limited (HKMC) has announced revisions to the Mortgage Insurance Programme - suspending applications of mortgage loans exceeding 90% loan-to-value (LTV) ratio; lowering the maximum amount for mortgage loans of 90% or below LTV from HKD12m to HKD7.2m; and capping the maximum DSR at 50% for all income groups.

HKMC’s Executive Director and HKMA’s Deputy Chief Executive, Peter Pang, said: "Taking into account the current market conditions, these revisions aim to ensure that the HKMC is taking a prudent approach to risk management on its exposure to high LTV mortgage lending. Homebuyers are reminded that they should consider their repayment capability more prudently and avoid overstretching themselves which could lead to repayment difficulties."

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