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Hong Kong Homes Face 20% Price Drop as Banks Raise Rates

Hong Kong officials, who have struggled in vain for three years to slow the growth in home prices, are about to get their wish as the city’s biggest banks raise mortgage rates.

Prices could fall as much as 20 percent over the next two years, according to Deutsche Bank AG, after lenders including HSBC Holdings Plc, Hong Kong’s biggest by assets, and Standard Chartered Plc raise their home loan rates by 25 basis points in response to tighter risk rules.

Hong Kong dollar’s peg to the U.S. currency has kept interest rates in the city at near record lows, underpinning a more than 110 percent gain in home prices since the beginning of 2009 to the most expensive among major global cities. Low mortgage costs, coupled with a property buying spree driven by Chinese from the mainland, have seen home prices shrug off repeated attempts by the government since 2010 to stymie escalating housing values amid an outcry over affordability.

“You have this pile of measures plus higher interest rates; this will be a big challenge for the market,” said Buggle Lau, chief analyst at Midland Holdings Ltd. (1200), the city’s biggest publicly traded realtor, which predicted as many as a third of real estate agent branches in Hong Kong will close.

Chief Executive Leung Chun-ying, who took over in July as head of the government, on Feb. 22 imposed his toughest yet price-curbing measures by doubling the stamp duty on all property transactions higher than HK$2 million ($257,700). The same day, the Hong Kong Monetary Authority told banks to maintain the risk weighting for new home loans at a minimum of 15 percent to help protect them against a drop in home values.

Mispricing Loans

London-based HSBC was the first among Hong Kong’s lenders to lift rates from March 14. Its mortgages linked to the best lending rate climbed to a range of 2.85 percent to 3.15 percent, while at Standard Chartered, also headquartered in London, they are from 3.1 percent to 3.5 percent.

BOC Hong Kong Holdings Ltd. (2388), the city’s largest mortgage lender, increased its prime-linked mortgage rate to 2.4 percent to 3.05 percent, according to a March 20 statement. Hang Seng Bank Ltd. (11), controlled by HSBC, has raised its mortgage rates to 2.4 percent to 3 percent. Bank of East Asia Ltd. (23) upped its prime rate-linked mortgage terms to 2.9 percent to 3.4 percent. Major banks in Hong Kong last lifted mortgage rates in November 2011.

“Banks were mispricing their retail mortgage loans,” Sebastian Paredes, chief executive officer for Hong Kong at DBS Group Holdings Ltd., Southeast Asia’s largest bank, said in a March 8 interview. “Now with the new measures from HKMA, they will be forced to correct it.”

‘Larger Corrections’

The rate increases may finally put a dent in prices, which have climbed 16 percent since Leung was sworn in on July 1, according to an index compiled by Centaline Property Agency Ltd.

“With the new government measures, the potential further rises in mortgage rates, and the expected increases in new supply in the medium term, we expect property prices to show larger corrections,” Tony Tsang and Jason Ching, analysts at Deutsche Bank, wrote in a March 13 report.

A 60-square-meter (646 square feet) apartment on Hong Kong Island cost about HK$125,000 a square meter in January, according to the Rating and Valuation Department. By that calculation, it would cost about HK$7.5 million($970,000) on average. An equivalent sized apartment in Manhattan would cost about $700,264, according to Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.

Extra Tax

Since 2010, Hong Kong has imposed an extra tax of up to 20 percent of the value of homes on buyers who resell them within three years after purchasing, and raised the minimum down- payment requirement on mortgages for homes valued at more than HK$7 million. Leung, in October, imposed an extra 15 percent tax on all home purchases by companies and non-permanent residents, and promised to raise land supply for private development and to build more government housing.

While the impact on prices has yet to surface, the measures have reduced transactions. The average number of homes changing hands every month fell to 6,777 last year from 7,039 in 2011 and 11,315 in 2010.

Prices of both residential and commercial real estate have “come down” in the past two weeks and the property market is “stabilizing,” Chief Executive Leung said today at the Credit Suisse Asian Investment conference.

Total home transactions may fall below 3,000 in March and prices may drop as much as 10 percent this year, said Midland’s Lau. That would be the fewest monthly deals since 2003 when Hong Kong was nearing the end of a six-year property slump brought on by the Asian financial crisis, the burst of the dot.com bubble and the Severe Acute Respiratory Syndrome epidemic.

Richest Man

Developers are responding. Cheung Kong Holdings Ltd. (1), the builder controlled by Li Ka-Shing, the city’s richest man, cut prices at one of its projects by 11 percent on March 5, while Sun Hung Kai Properties Ltd. (16), the city’s biggest builder by value, on Feb. 28 cut its target for the fiscal year ending June by 8.6 percent to HK$32 billion. New World Development Co. lowered its sales target in response to the curbs.

Macquarie Securities Ltd. has an underweight rating on Hong Kong’s property market and is expecting home prices to drop 10 percent in 2013, analyst David Ng said.

Ng is advising clients to sell Sun Hung Kai and ranks Cheung Kong its “top pick” among Hong Kong developers because it is “ much more flexible on pricing and timing of their project launches.”

Bocom International Holdings Co. lowered Midland’s rating to sell from neutral partly “in anticipation of sluggish transaction volume over the next six months,” analyst Alfred Lau wrote in a March 19 report.

Most Expensive

The Hang Seng Property Index, which tracks the nine biggest developers listed in Hong Kong, including Cheung Kong and Sun Hung Kai, dropped 0.4 percent at the close. The index has fallen 5.5 percent this year, compared with the 2.4 percent decline in the Hang Seng Index.

Home prices dropped about 6.5 percent before recovering after banks boosted home loan charges six times in 2011.

Hong Kong has the highest housing costs among major global cities, according to a report this month by broker Savills Plc (SVS) that includes London, New York, Paris and Tokyo.

Homes in the city cost an average of 13.5 times the gross median household income, up from 12.6 times a year ago, making it the most expensive housing market in an annual affordability survey by Belleville, Illinois-based consulting company Demographia released in January.

The rate increase will help Standard Chartered ease home- loan funding pressure after the new 15 percent HKMA requirement. Standard Chartered assigned a risk weighting — the percentage of capital a bank is required to keep to cover its liabilities – – of less than 10 percent to home loans before the rule, said Mark Huen, head of consumer banking in Hong Kong.

Follow Suit

Lenders may increase mortgage rates this year by a total of 50 basis points to neutralize the impact of the risk floor, said Dominic Chan, an analyst at BNP Paribas SA.

“With the larger banks increasing mortgage rates, the smaller ones will follow suit,” said Chan. “But they won’t increase mortgage rates too much as this would cause home prices to fall, which isn’t good for them.”

HSBC was ranked second in Hong Kong’s home-loan market last month with a 17 percent share, while Hang Seng was third with 16 percent and Standard Chartered fourth with 13 percent, according to mReferral Mortgage Brokerage Services. BOC Hong Kong (Holdings) Ltd. (2388) ranked first with a 20 percent market share, according to Hong Kong-based mReferral.

The value of new residential mortgage loans drawn in Hong Kong declined 16 percent from a year earlier to HK$15.9 billion in January, the lowest in 10 months, HKMA figures show.

Affordability Ratio

“The change in the monetary environment remains our key concern to determine the overall Hong Kong asset market outlook,” Jefferies Group Inc. Hong Kong-based analysts Venant Chiang and Christie Ju wrote in a March 13 report. They predicted a decline in home prices of as much as 10 percent this year in a separate report in August.

The affordability ratio for Hong Kong homes of about 40 square meters to 70 square meters — which account for half of total private housing — is currently about 49 percent, meaning borrowers on average spend just under half of their income repaying mortgages, according to Jefferies.

To maintain the same level of affordability, prices will have to decline about 15 percent if mortgage rates rise by 1 percentage point, according to the Jefferies analysts.

Only one transaction of existing homes was recorded at 10 of Hong Kong’s biggest private residential developments tracked by Centaline, the city’s biggest closely held real estate agency, over the March 16 and 17 weekend.

“The situation is disastrous,” said Louis Chan, managing director for residential sales at Centaline. “Potential buyers see these government measures and banks’ actions and now they are all getting cold feet.”

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