26 April 2017 - The increasing costs of property ownership is a prevalent topic in Hong Kong. Despite more stringent mortgage lending requirements and the introduction of the Government stamp duty last year, the resounding trend in property prices is upwards. Looking to the Centaline’s Centa-City Index as a marker, house prices in March 2017 alone rose by 1.80 per cent. This has a sizeable impact on first-time buyers who not only incur the higher costs of mortgage payments but are at a greater risk of negative equity.
Disenfranchisement of prospective buyers
Though ancillary to first-time buyers, the most immediate effect of high property prices is staving off potential buyers and disenfranchising the prospect of home ownership for large segments of the Hong Kong population. Given that the statutory requirement in Hong Kong is HK$34.5 per hour and that in 2016 the Real Wage Index only increased by 2.5 per cent year on year as compared to a 32.9 per cent increase in residential property capital values in March 2017 alone, home ownership is simply not a feasible option for prospective buyers with particular reference to young people.
Tighter mortgage requirements
Aside from the above mentioned stamp duty, cooling measures introduced in previous years to offset high prices include tighter mortgage requirements for lending institutions. Though exemptions under the Mortgage Insurance Programme allows first-time homebuyers to receive 90 per cent loan-to-value for properties worth less than HK$ 4 million and 80 per cent for properties worth up to HK$ 6 million, home prices beyond the aforementioned price bands are subject to a cap of at most 60 per cent. Moreover they are subject to stress tests which assume a rate change of 300 basis points. Home buyers ultimately need to guarantee more collateral and lay out a substantial deposit as house prices continue to climb.
First-time buyers take on larger mortgages
Attendant to strict requirements, given the issue of affordability first-time buyers will have to take on larger mortgages. According to mReferral in June 2016, 35.1 per cent of its client base were opting to borrow 70 to 90 per cent of their home purchase value (the highest figure on record) whereas the majority of loans offered to first-time buyers were for flats below HK$ 6 million. To put this into context as of February 2017 according to the Rating and Valuation Department, the average price on Hong Kong Island for a 430 sq.ft flat amounts to a retail price of HK$ 5.8 million as compared to HK$ 5 million in February 2016. As property prices continue to surge beyond the margin of HK$ 6 million and subsequently beyond the legal lending requirement of traditional lending institutions, those looking to buy will have to resort to alternative sources of funding.
Developer’s mortgages and risk of negative equity
Developer’s mortgages address a shortfall within the Hong Kong real estate market for buyers without sufficient savings to make the initial down payment and buyers who fail to meet bank’s lending standards. According to mReferral Mortgage Brokerage Services, buyers taking out mortgages from developers constituted 22 per cent of the primary market in February 2016 compared to just 3% back in November 2015. As a corollary effect to this, the number of negative equity cases rose by 14 fold in the first quarter of 2016. Given that only an estimated 10 per cent of employed people in Hong Kong can afford a flat which costs within the range of HK$ 4 million to HK$ 6 million, for the first-time home buyer without financial flex, changeable interest rates could affect their ability to service the mortgage, leading to an increased risk of bankruptcy and forfeiture of their deposit.
