Friday, June 10, 2011

Hong Kong imposes additional property curbs

The Hong Kong government has introduced it's fourth round of measures intended to curb rising prices in Hong Kong's over heated property market. The latest measures are:

- increasing the minimum deposit for properties costing more than HK$10 million to 50% and those between HK$6 - 10 million to 60% (with a cap of HK$5 million)

- requiring buyers who are not ordinarily resident in Hong Kong to put up an additional 10% deposit. This represents the first time that Hong Kong has discriminated against overseas buyers of Hong Kong properties. Commentators have been quick to claim (probably correctly) that this is primarily directed at buyers from the PRC mainland

- putting additional development sites up for auction. Most of the additional sites are relatively small sites suited for luxury properties

With interest rates on new mortgages having been increased to levels which are materially higher than those which many (if not most) borrowers ares paying on existing mortgages, one of the effects of the various cooling measures is to give incentives to people not to sell properties and make it harder for people to trade up - sellers will face higher stamp duty, higher borrowing costs and reduced availability of mortgage finance.

So far the only effect of the cooling measures is to reduce liquidity in the market.

In the longer term, one of the effects of the cooling measures is to materially reduce the risk to both the banks and investors of a decline in property prices or an increase in interest rates (mortgage interest rates are generally floating in Hong Kong). In very simple terms, with such low levels of leverage being used, the risk of default or negative equity is substantially reduced.

The other factor to bear in mind is that if the market starts declining, the government will have the ability to support the market simply by reversing some or all or the cooling measures.

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