2014-03-10

Mortgage Rates Rise in China; Hong Kong Housing Market in Trouble

The unfolding property bust in Hong Kong is related to the slowdown in Mainland China. Cities such an Vancouver, Sydney and Palo Alto will be next.

Dark clouds over Hong Kong's property market as 'perfect storm' looms
Hong Kong's housing market faces being caught in the middle of a perfect storm, with government curbs having crimped demand at a time of increasing supply and an imminent interest rate rise threatening to set off a severe price correction.

Home prices in the second-hand market peaked at 18 per cent above the previous 1997 high in March last year after doubling since 2008, but have since fallen 5 per cent in a sign the government's tough stance on reining in an overheated market is having the effect desired by Chief Executive Leung Chun-ying.

A collapse in demand that saw overall property sales plunge to a 23-year low of 70,501 deals last year has fuelled fears of a repetition of major downward trends of the past.

Banks underprepared for HK property slide risks
For local banks facing the risks of a bubble bursting, the great saving grace is that there are quite strict limits on the loan-to-value ratios allowed for mortgage lending. Even with a heavy drop in prices – some are predicting up to 30 per cent falls this year – losses should be limited. However, in combination with rising interest rates and the ebbing of both the Chinese economy and US liquidity, small property price declines will be painful for the island’s most sophisticated banks.

The money flooding into Hong Kong, much of it from China, has been eye-popping in the past couple of years. Home prices are 20 per cent higher than the previous record set in 1997, just ahead of the Asian financial crisis, according to the Centaline Index, from the city’s largest estate agency.
Losses are always supposed to be limited. First of all, the economy relies on property speculation. When the bubble bursts, it isn't going to only hit home prices, it will hit incomes. Debt servicing will rise as a percent of total income. Second, a lot of debt is hidden. For example, in the cities such as Beijing and Shanghai, there are property rich people. Their income comes from mortgage equity withdrawals. Sometimes this is also used to fund speculation or a down payment on a home for a child. If you look at each individual transaction it looks good, but there may be more risk than people realize.

China banks raise mortgage rates on funding squeeze
Nearly 90 percent of 69 bank branches in 22 Chinese cities have stopped offering preferential mortgage rates to first-home buyers, with some increasing the rates 5 to 10 percent above the benchmark rate, according to a survey by CRIC, a unit of real estate services firm E-House China.

Less than 3 percent of the respondents still offer preferential mortgage rates, the survey showed.

That compared with 21 percent of bank branches offering discount mortgage rates to first-time home buyers in the previous survey conducted in December 2013.

"The increasing home mortgage rates will likely weaken the purchasing power of first-home buyers and curb home buying demand," said Yang Kewei, a property analyst at CRIC in Shanghai, adding that liquidity conditions have tightened this year as banks turn to more profitable loans.
However, this article in Chinese (住房按揭利率上浮 房屋销售市场却“涨声依旧”) refutes the slowdown thesis, at least so far and in Beijing, where the sellers are still in control of the market.

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