Occasional Papers | Land, housing and infrastructure | 2015-03-04

How prudential measures affect property purchase decisions of potential buyers



The Hong Kong Monetary Authority (HKMA) has lately released the seventh round of supervisory measures on property mortgage to strengthen banks’ risk management and resilience, which has aroused heated discussion. The Bauhinia Foundation Research Centre (the Centre) today released a new edition of Occasional Paper on ‘Choices for Homebuyers under Prudential Measures on Hong Kong’s Housing Market’, which reviews the trends of property prices, transaction volume and completion, and attempts to analyse how various regulation measures affect the property market. Based on results of quantitative analyses, this paper particularly looks into the magnitude of the suppression on purchasing power after imposing property mortgage prudential measures, which directly affects the choices of potential buyers.

Hong Kong residents were frustrated by the unaffordable housing prices in recent years. In response to the exuberant property market, the Government had imposed three rounds of stamp duty to deter speculative activities. However, they could not stop the rally of property prices.

The study finds out that the property prices went up almost uninterruptedly since 2004, except for a mild decline from the global financial tsunami between 2008 and 2009. The situation of small-sized private residential units was the most remarkable, with the price index outperforming the overall market since 2010. A further analysis on the surge in property prices in recent years reveals that the trends of price and transaction volume matched closely since 2009. The trends diverged for the first time after the introduction of Special Stamp Duty (SSD) in November 2010. The following introduction of Buyer’s Stamp Duty (BSD) and Double Stamp Duty (DSD) could not hinder rising property prices, but led to a shrinking transaction. For example, the transaction volume of property with value below HK$3 million radically dropped from 82,894 in 2010 to less than 12,000 in 2014.

Compared with the annual average private residential property completions of over 20,000 during early reunification, the 10-year average completion between 2004 and 2013 was merely 12,760, in which small-sized units accounted for only 1,266. The low completion further intensified the imbalance of supply and demand in residential property market.

The HKMA and the Hong Kong Mortgage Corporation Limited (HKMC) have also introduced several rounds of prudential measures on banks’ property mortgage business in view of lowering homebuyers’ mortgage leverage and reducing potential risks to financial stability arising from the property market. The emphasis of this study is to investigate the impact of changing prudential measures on first time homebuyers for self-occupied purpose.

In respect of Loan-to-Value (LTV) ratio, the HKMA and HKMC have tightened the LTV ratio and the maximum loans of residential property from higher to lower price by stages in the past few years, which directly suppressed the purchasing power of potential buyers.

The amount of down payment for properties valued at HK$4 million above has increased substantially after imposing several rounds of prudential measures by both authorities. For a residential property valued at HK$8 million, the amount of down payment increased from HK$2.4 million in August 2010 to HK$3.2 million at present under the HKMA’s regulations; and the related amount of down payment rose from HK$0.8 million in August 2010 to HK$3.2 million under the Mortgage Insurance Programme (MIP). Given the lack of down payment, buyers with good credit history and strong repayment ability are confined to a narrower range of options, and shift to lower-priced properties.

The prudential measures on mortgage applicant’s Debt Servicing Ratio (DSR) ensure their repayment ability against interest rate hikes under stress test would not exceed the affordability of applicants when the mortgage interest rate is on a rise. Take a couple aged 25 to 34 with median monthly income amounted to HK$30,000 as an example: before tightening of DSR by the HKMA, the maximum DSR was 60%. Assuming the mortgage interest rate and the payment period to be 2.15% and 30 years respectively, their maximum mortgage loans was about HK$4.77 million. Compared with the current situation, the maximum DSR of mortgage applicants cannot exceed 60% under stress test of an increase in mortgage rate of 300 basis points, the maximum mortgage loans of the couple fell drastically by 30.9% to around HK$3.3 million.

The study also indicates that lower-income groups are bounded by DSR under the stress test, whereas higher-income groups are constrained by the LTV ratio regardless of their higher repayment ability. An absence of sufficient down payment drove higher-income groups looking for lower-priced properties. Assuming the homebuyers’ savings equal to two years of their income, the highest affordable property prices for an applicant with monthly income of HK$30,000 dropped 9.2% from HK$4.42 million in August 2010 when the major prudential measures were introduced to the current figure of HK$4.02 million; for an applicant with monthly income of HK$60,000, it slumped 30.6% from HK$8.64 million to HK$6 million. From these examples, it suggests that evidently homebuyers have fewer options, with higher-income groups being the most acutely affected by the situation.

The prudential measures have assured the banks and theirs customers with sufficient cushions to ride out volatilities in property prices, however, they have significantly suppressed the purchasing power of potential buyers. The successive prudential measures inevitably turn buyers with good credit history and stronger repayment ability to lower-priced market, thereby pushing up the price of these units and making home ownership even more difficult. Some of the buyers may be diverted to rental market under this circumstance, with the rents being pumped up and extra burden added on residents’ housing expenditure (especially for those with lower income).

In the interest of minimising the impact of prudential measures on first time homebuyers and those with the needs of replacing an existing property for self-use, the Centre recommends the HKMC to adjust the maximum value of residential property and the maximum mortgage loans covered by the MIP based on their credit history and repayment ability. The authority should also consider developing more diversified mortgage plans to improve the secondary mortgage market, promote the stability of the financial system and facilitate home ownership in Hong Kong.

The healthy development of the property market mainly relies on supply and demand balance. A blueprint for engaging the needs of the changing demographic and business development may be a comprehensive measure in the long term. 

Please refer to the Paper for details.

 




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