2 March 2015

The Hong Kong Monetary Authority (HKMA) chief executive Mr. Norman Chan Tak-lam announced a new round of mortgage tightening measures on the 27th February 2015 to cool the overheated housing market, targeting the small-to-medium sized flats. Undercurrents of economic uncertainty are growing already as prices for both the private and public homes broke new records despite government cooling measures and repeated warnings of interest rate hikes. Private homes soared 14% in 2014 in spite of hefty levies. The introduction of further countercyclical measures is to safeguard the stability of the banking and financial system, the HKMA chief executive, Mr. Norman Chan Tak-lam said.

The new round of tightening on mortgage requirements with immediate effect:

  1. The maximum loan-to-value (LTV) ratio for self-use residential properties with value below HK$7 million is lowered by a maximum of 10 percentage points from 70% to 60%.  
  2. The maximum LTV ratio under the Mortgage Insurance Programme offered by Hong Kong Mortgage Corporation is reduced from 90% to 80%, except for applicants who are first time homebuyers acquiring for self-use and meeting the salary requirement.
  3. The maximum debt-servicing ratio (DSR) for borrowers who buy a second residential property for self-use will be lowered from 50% to 40% and the stressed-DSR cap is lowered from 60%to 50%.
  4. The maximum DSR of mortgage loans for all non-self-use properties, including residential properties, commercial and industrial properties and car parking spaces, will be lowered from 50% to 40%, and the stressed-DSR cap is lowered from 60% to 50%.

Colliers’ View

The surge in home prices in 2014 has prompted HKMA to roll out further anti-cyclical measures, which reflects the government’s strong determination to cool the market. The new tightening mortgage lending rule will inevitably affect some of the users and first time home buyers. The HKMA had introduced several rounds of mortgage tightening in the past but the impact was very short-lived and yet property prices continued with its upward cycle. All these administrative measures have distorted the market by reducing supply in the secondary market and strengthening demand for smaller apartments. The most fundamental and ultimate solution is to increase housing supply.

The new rules will dampen the market sentiment but we believe the potential hit is manageable by major developers. It is evidenced that developers were able to provide top-up financing to help homebuyers to enter the market. We believe potential buyers can get second mortgages offered by developers to cover down-payments; as such the primary sales market will remain the focus this year. However, developers are unlikely to slash prices – undercutting the secondary market to attract buyers but offer second mortgages to cover down-payments.

The number of flats in the secondary market available for sale is expected to remain low, as the new measures will not trigger home owners rushing to sell their existing apartments. Overall sales transaction volume will hover at around 4,000 units per month, and it is expect to last for three to six months. This time round the impact will be smaller than the period after the implementation of double stamp duty in February 2013, in which the low transaction volume lasted for 12 months. Prices in the secondary market will stay at the current level instead of experiencing a drastic decline. We maintain our forecast that property prices to grow by 3-5% in 2015. Prospective property buyers have always been financially strong as the tougher borrowing measures imposed have effectively removed weak home buyers, and the stress tests have already factored in the potential interest hike. Therefore a moderate interest rate increase would pose little threat to Hong Kong’s housing market.    

 

Source: Land Registry

 

 

Source: Rating and Valuation Department, Colliers

Appendix:

HKMA Guidelines on Maximum loan-to-value (LTV) ratio:

 

Applicants without outstanding property mortgage loans

 

 

Residential Properties

 

Commercial, Industrial properties & Car Parking spaces

 

Self-use

Non-self-use or company held

Non-self-use or company held

Income derived in HK

Income from Overseas

Income derived in HK

Income from Overseas

Income derived in HK

Income from Overseas

<HK$7 million

60%

50%

50%

40%

40%

30%

≥ HK$7 million

 but

< HK$10 million

60%

 

(a loan cap at HK$5.0 million)

50%

 

(a loan cap at HK$3.0 million)

≥ HK$10 million

50%

40%

 

 

Applicants with existing outstanding property mortgage loans

 

 

Residential Properties

 

Commercial, Industrial properties & Car Parking spaces

 

Self-use

Non-self-use or company held

Non-self-use or company held

Income derived in HK

Income from Overseas

Income derived in HK

Income from Overseas

Income derived in HK

Income from Overseas

<HK$7 million

60%

40%

50%

30%

40%

20%

≥ HK$7 million

 but

< HK$10 million

60%

 

(a loan cap at HK$5.0 million)

40%

 

(a loan cap at HK$3.0 million)

≥ HK$10 million

50%

30%

HKMA Guidelines on Maximum debt-servicing ratio (DSR):

 

Applicants without outstanding property mortgage loans

 

 

Residential Properties & Car Parking spaces

 

Residential, Commercial, Industrial properties & Car Parking spaces

 

Self-use

Non-self-use

Income derived in HK

Income from Overseas

Base-DSR Cap

50%

40%

Stressed-DSR Cap

60%

With an assumption of 300 bps interest rate increase

50%

With an assumption of 300 bps interest rate increase

 

 

Applicants with outstanding property mortgage loans

 

 

Residential Properties & Car Parking spaces

 

Residential, Commercial, Industrial properties & Car Parking spaces

 

Self-use

Non-self-use

Income derived in HK

Income from Overseas

Base-DSR Cap

40%

Stressed-DSR Cap

50%

With an assumption of 300 bps interest rate increase

Source: HKMA