Tuesday, November 11, 2008

Negative equity is back

This should not come as a surprise to anyone but the number of negative equity cases in the housing market is back to an estimated 10,000. Most of these would have been people who purchased in the first eight months of this year with less than the standard 30% deposit.

Given the well regulated nature of the Hong Kong banking sector, banks can only lend up to 70% of property's value. Buyers who want to borrow more must either get insurance ( from the Hong Kong Mortgage Corporation) or go to a finance company for a second mortgage. Both of these are expensive options. However, given that banks have become more conservative in valuing properties for mortgage purposes some home buyers have been forced to resort to them. In effect it is the most marginal buyers who are now facing negative equity.

There is, as yet, no indication that mortgage defaults are rising from the extremely low levels experienced over the last few years.

Lastly, during the SARS epidemic at the end of the Asian financial crisis in 2003, negative equity cases peaked at an estimated 103,000 cases.

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