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Hong Kong ups mortgage threshold, eases debt rules for first-time buyers

By Asia Asset Management  
Oct 18, 2019

Hong Kong has raised property value limits for mortgage insurance and eased debt rules for first-time home buyers, which will allow them to buy more expensive homes.

The move drew mixed reaction as to whether it can stabilise high housing prices in the city, and prompted Citibank to warn that the looser debt rules could expose the banking system to asset quality risk.

First-time home buyers can now buy property valued at up to HK$8 million (US$1.02 million) in order to obtain a 90% loan under the Hong Kong Mortgage Corporation’s mortgage insurance programme, and up to HK$10 million for an 80% loan. The previous limits were HK$4 million and HK6 million, respectively.

The government-owned mortgage agency insures mortgage loans extended by banks, which can only lend to home buyers who have the insurance.

The government has also waived the 50% debt-to-income ratio requirement for first-time buyers, which means their monthly mortgage repayments can exceed half their salaries.

Hong Kong Chief Executive Carrie Lam announced the easier rules in her annual policy address on October 16, when they became effective, in a move to address housing needs in the city.

The new measures have already prompted some sellers to raise house prices but it’s unlikely to create a property market bubble, according to Terence Chong, associate professor of economics and executive director of Hong Kong’s Lau Chor Tak Institute of Global Economics and Finance.

“Only a small group of middle-class buyers benefit from the policy…They should have sufficient financial power to withstand the market impact even if the economic situation goes wrong,” Mr. Lau tells Asia Asset Management (AAM).

Shortage of land has driven up house prices in Hong Kong over the years. US urban planning consultancy Demographia has ranked Hong Kong as the world’s least affordable property market every year since 2002.

The Centa-City Leading Index, which mirrors residential property prices, hit a record high 190 points in June.

The index has dropped 4% since then because of the ongoing social unrest in Hong Kong and the US-China trade war, says Paul Tang, chief economist of Bank of East Asia, who expects the new measures to “help slow down its downside correction”.

But any increase in prices may be temporary, according to Patrick Ma, director for listed products and research at Hong Kong’s Admiral Investment.

Mr. Ma tells AAM that the property market “has entered into a downward cycle” and “potential buyers will seriously consider their affordability before moving into the market”.

Meanwhile, Citibank is warning about the risks that could arise from loosening the debt-to-income requirement.

It “would make the banking system more vulnerable to asset quality risks, potentially stemming from macro shocks or any property price correction”. Yafei Tian, an equity analyst at the bank, writes in a report on October 16.