(Updates with closing property index level in seventh paragraph.)
June 7 (Bloomberg) -- Hong Kong banks may have succeeded where the government failed as rising mortgage rates curb home price gains and cut sales to the lowest level in two years, signaling the property market may have peaked.
HSBC Holdings Plc, which controls two of the city’s three- biggest banks by customers, is among lenders that accelerated mortgage rate increases in April as liquidity dried up. An index of home prices has stalled since March 20, while the number of sales in April fell 37.6 percent from a year earlier to the lowest in more than two years, according to the Land Registry.
The government has come under pressure to cool the property market, the world’s priciest according to Savills Plc, which had surged as much as 70 percent since the beginning of 2009 on record-low mortgage rates, an influx of buyers from other Chinese cities, and a lack of supply. Its toughest measures in November, including releasing more land and higher deposit requirements, had failed to contain what the Hong Kong Monetary Authority warned was a “credit-fueled property bubble.”
“The government measures had limited impact,” said Simon Lo, Hong Kong-based head of research at Colliers International “The only thing that has an immediate impact on the market, save for major external shocks, is interest rates.”
Andrew Lawrence, a Hong Kong-based analyst at Barclays Capital, is among those betting the property market in the city of 7 million people has peaked. Prices may decline 10 percent to 20 percent in 2012 and a further 10 percent in 2013 on rising mortgage rates, Lawrence said in an interview on Bloomberg Television today.
“Buying sentiment has materially declined,” he wrote in a May 26 report, with a “negative” rating on Hong Kong developers, meaning their stocks’ valuations are deteriorating. “With liquidity continuing to tighten, we expect additional mortgage rate increases this year, which are likely to further impact buying sentiment and transaction volumes.”
The Hang Seng Property Index, which tracks seven of the city’s biggest developers, fell 0.3 percent today to close at the lowest in almost three months. It lost 6.2 percent this year, underperforming the 0.7 percent decline in the benchmark Hang Seng Index. Six of the stocks in the property index dropped in 2011: Sun Hung Kai Properties Ltd., the world’s biggest developer by value, lost 9.6 percent, while Hang Lung Properties Ltd. fell 14 percent.
Since 2009, interest rates in Hong Kong have been close to the lowest since 2004, when the city was recovering from an economic slump triggered by the Sept. 11 U.S. terrorist attacks in 2001 and the 2003 Severe Acute Respiratory Syndrome epidemic in Asia. Hong Kong’s three biggest mortgage lenders currently charge new borrowers about 1.7 percent to 2.2 percent, or 1.5 to 2 percentage points above the Hong Kong Interbank Offered Rate. That compares with about 1 percent last year, when lenders often priced mortgage terms at less than 1 percentage point above Hibor, the rate banks charge each other for borrowing.
For a HK$2 million ($257,000), 20-year mortgage, the increased interest rate of 2 percent from 1 percent means an extra HK$11,000, or 10 percent, in annual repayments, Bloomberg calculations show.
Higher mortgage rates are “taking away one side of the demand in the housing market,” said Lee Wee Liat, Hong Kong- based analyst at Samsung Securities Ltd. “This is driving down yields. Many people considering buying properties will drop their plans.”
The number of home transactions fell for a fifth straight month in May. The number of units that changed hands last month declined 12 percent from a year earlier to 9,681, according to the Land Registry.
Hong Kong Chief Executive Donald Tsang faced a public outcry last year as government efforts to stem surging house prices had little effect. Prices have risen about 140 percent from the end of 2003 to end 2010, according to an index compiled by Centaline Property Agency Ltd., Hong Kong’s biggest closely held realtor. Average household incomes rose 20 percent in the same period, according to the statistics department.
While fewer people can afford to buy a place in the former British colony, the affordability ratio, a measure of mortgage installments relative to household incomes, remains well below the 90 percent reached in 1997 at the onset of the Asian financial crisis, said Buggle Lau, chief analyst at Midland Holdings Ltd., Hong Kong’s biggest publicly traded realtor. The ratio fell to as low as 15 percent in 2003, climbed to 25 percent in 2009 and now stands at 40 percent, said Lau.
“Compared to two years ago, there are a couple more unfavorable factors,” such as rising interest rates and increased land supply, said Lau. Still, homes are more affordable than when the market last peaked as incomes are rising, he said. “There’s a huge difference between now and what happened during the last crash in 1998.”
Shift to Yuan
Hong Kong’s banks have less money to lend for property as depositors shift to yuan over Hong Kong dollars and as Chinese companies seek loans in the city due to tightening policy on the mainland. The loan-to-deposit ratio for the local currency has risen to 81 percent at the end of March, the highest since the third quarter of 2008, according to Barclays.
Hong Kong’s bank interest rates will rise on loan demand and capital outflows when the U.S. increases borrowing costs, Norman Chan, head of HKMA, the city’s de-facto central bank, said on April 28. The central bank, which doesn’t have an independent interest-rate policy because of the local currency’s peg to the U.S. dollar, has kept its base rate at a record-low 0.5 percent since December 2008.
Cost of Funding
“The mortgage spread will remain on a rising trend this year,” William Leung, an executive director at Hang Seng Bank Ltd., a unit of HSBC, said in an e-mailed reply to queries from Bloomberg News. “With the tightening of Hong Kong dollar liquidity and deposits growth skewing towards yuan, funding costs have been driven up.”
Leung’s comments echoed those of Peter Wong, chief executive officer for the Asia-Pacific region for HSBC, who said in a May 16 interview that mortgage rates may rise further as liquidity tightens among Hong Kong banks.
An increase in interest rates in the U.S. and China will add pressure for local mortgage rates to climb further, according to Robbie Choi, head of mortgage and personal loan center at Wing Lung Bank Ltd., the local unit of China Merchants Bank Co., the nation’s sixth-largest lender.
“Loan growth has been increasing at a faster pace than deposit growth,” Choi said. “Banks are paying higher interest rates to attract more deposits and this partly contributed to the increase in their cost of funding.”
At the Peak
Average mortgage rates may rise to as high as 2.5 percentage points above Hibor by the end of this year, said Choi.
Home prices today exceed the peak in the second half of 1997, according to government statistics and a Centaline index that tracks housing prices in Hong Kong. Real estate values tumbled 70 percent between 1998 and 2003 when confidence was damped by the Asian financial crisis, the 2000 dot-com bubble, Sept. 11 and the SARS epidemic.
The government in November introduced additional stamp duty taxes on property transactions and has accelerated its public land auctions. Lawmakers have called on the government to limit purchases of local properties by buyers from other cities in China, whom Centaline estimated were responsible for a third of luxury property purchases in Hong Kong last year.
“If you ask me to rank all the factors, the most important ones are whether home buyers can borrow enough money and the increase in mortgage costs,” said Billy Mak, an associate professor in the department of finance and decision sciences at the Hong Kong Baptist University.
--With assistance from Sophie Leung and Susan Li in Hong Kong. Editors: Malcolm Scott, Andreea Papuc.
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