New measures to cool the Hong Kong property market

The Hong Kong government and the Hong Kong Monetary Authority announced measures to cool the local property market.

As background, property prices in Hong Kong have appreciated to levels which are approaching the 1997 highs on the back of (i) cheap money (interest rates have dropped below 1% again), (ii) plentiful supply of credit (Hong Kong banks are awash with funds), (iii) limited supply (iv) demand from wealthy mainland buyers and (v) confidence that the government will not repeat the policy errors that exacerbated the post-1997 decline in property values.

The total value of outstanding mortgages has risen from HK$587.6 billion at the end of 2008 to HK$679.5 billion at the end of June 2009.

While affordability ratios are still attractive (and much better than in 1997), the extremely low interest rates are a major contributor to housing affordability. Affordability is highly vulnerable to any substantial increase in interest rates.

The new measures:

1. the deposit requirement for a property costing HK$12 million or more is increased from 30% to 40%

2. for properties worth less than HK$12 million, the maximum mortgage will be the lesser of 70% or HK$7.2 million. In effect the minimum deposit requirement will increase for properties costing HK$10.3 million

3. banks will be required to stress test borrowers' ability to service loans - based on a 2% increase in the mortgage rate, a maximum of 60% of household income may be used to service mortgages

4. the government will release additional land plots for sale to developers next year

5. buyers of unfinished units will be banned from reselling before completion and will lose a 10% deposit if they fail to complete

Today's announcement follows earlier measures aimed at the luxury sector by increasing the deposit requirement for and the stamp duty payable on properties valued at HK$20 million or more.

I have no idea whether these measures will be effective or not - hopefully they will. Even as an investor in Hong Kong property, I have no wish to see an unsustainable bubble develop.