A passerby looks at rising indexes from three major European markets, outside a bank in Hong Kong on Thursday. The US central bank on Thursday said it will launch a fresh round of bond-buying to stimulate the economy, and will purchase $40 billion of mortgage debt each month. Bobby Yip / Reuters

HK tightens down-payments on mortgages to curb soaring prices

The Hong Kong government introduced a fifth round of prudential measures to prevent local home prices from soaring even further, following the US move to launch a third round of quantitative easing (QE3).

The city's de facto central bank Hong Kong Monetary Authority (HKMA) said on Friday that it has ordered local banks to tighten borrowers' lending requirements, targetting borrowers who already have one mortgage loan on residential properties.

For home buyers who already have one property, their mortgage payments for investment properties cannot exceed 40 percent of their monthly income, down from the current 50 percent limit allowed. In other words, a new buyer of a second home has to make a 10 percent more down-payment in applying for mortgage loans under the new HKMA measure.

HKMA also said it had capped the maximum tenure for new home mortgage loans to 30 years to decrease the business risks undertaken by local banks. Some banks had been offering mortgages of up to 40 years.

"The QE3 policy leads the market to perceive that local home prices will rise further, however, this market expectation is deviating from the fundamentals so that the risk of an asset bubble formation is growing," Financial Secretary John Tsang said. "The government will introduce more measures if necessary and it will review the Special Stamp Duty (SSD) policy by the end of this year."

"The new measures are not to depress local home prices but rather it is to ensure the overall stability of the local banking system when the local home market cycle goes down. This is because the home mortgage loans represent a large asset mix of the Hong Kong banks," HKMA Chief Executive Norman Chan said.

The US Federal Reserve said it will buy $40 billion of mortgage-backed debt per month until the job market improves substantially as long as inflation remains contained - acting on its dual mandate to maintain price stability and tackle unemployment.

The US central bank also said it was unlikely to raise interest rates from the current lows until at least mid-2015, extending the time frame for such a move from late 2014.

Fuelled by record-low interest rate, a tight land supply and the influx of wealthy mainland buyers, Hong Kong's home prices have now surpassed their peak in October 1997, and have soared over 85 percent since the start of 2009.

According to Centaline Property Agency Ltd's data, local home prices have swelled 240 percent from the trough level in 2003.

The HKMA has already launched a fourth round of prudential measures since 2010 to contain rocketing home prices, as borrowers now have to put down a 40 percent down-payment for homes costing more than HK$7 million ($902,839). In 2010, the government introduced the SSD on residential units sold within two years of purchase.

Chief Executive Leung Chun-ying also announced 10 new measures in mid September to rein in home prices, including enhancing land supply and restricting developers and prospective home owners to resell the residential flats built on the two land parcels in Kai Tak area to local residents only.

"They could only stabilize property prices by controlling the pace of growth, but prices are unlikely to plunge. As long as low interest rates and ample liquidity remains, the risk of asset bubble remains," said Ronald Wan, a Hong Kong-based managing director at China Merchants Securities Co.

However some other analysts are more optimistic. "The new measure will deter speculative and investment demand and the yield for property investors will be lower," said Raymond Yeung, a Hong Kong-based economist at Australian & New Zealand Banking Group Ltd.

"As the government is releasing more land for sale, and may introduce more anti-cyclical measures in the future, so we predict local home price surge will not be excessive," Midland Realty Chief Analyst Buggle Lau told China Daily.

oswald@chinadailyhk.com

(HK Edition 09/15/2012 page2)