Hong Kong needs a radical rethink on home ownership
All the carrots they have dangled before prospective buyers have failed to stem the 28 per cent slide in prices
THE growing unease in Hong Kong’s property market is starting to overwhelm policymakers. All the carrots they have dangled before prospective buyers have failed to stem the 28 per cent slide in prices that began three and a half years ago.
The cycle of gloom is still nowhere near as vicious as the six-year, 70 per cent price deflation that followed the Asian Financial Crisis of 1997-98.
For one thing, the post-pandemic economic situation isn’t as bad as it was back then: The unemployment rate of 3.1 per cent is far below the 5.5 per cent average between June 1997 and July 2003. For another, the delinquency rate among borrowers whose mortgages are in negative equity – where the loan exceeds the value of the apartment – is still only 0.15 per cent. It was almost 3 per cent during 2002.
Yet, there are strong reasons to worry – and enough cause for a radical rethink of the home ownership equation.
The big hope last year was lower interest rates. That has started to fade because of US President Donald Trump’s potentially inflationary tariff war. Hong Kong homeowners’ ability to repay could still worsen, forcing banks to tighten lending standards for new borrowers.
Real-estate giant New World Development’s write-down of property values amid a high debt burden has investors concerned about local lenders’ exposure. With weak sales dragging down their finances, developers are shunning land sales by the government, crimping a major source of revenue for the city’s administration.
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In his annual budget statement on Wednesday (Feb 26), Financial Secretary Paul Chan announced that certain low-value transactions – about 15 per cent of total – will be practically free of stamp duties.
Enhancements will also be made shortly to a new programme that offers residency permits to wealthy foreigners for investing in the Asian financial centre, including in real estate. (The programme, which is also open to Chinese nationals settled abroad, has received more than 880 applications so far, Chan said.)
It’s unclear if these fresh steps to stoke demand will fare any better than the measures announced so far.
In his 2024 budget, Chan scrapped the extra stamp duties that had been in place for a decade to cool speculative purchases. In his annual policy address in October, Chief Executive John Lee relaxed the cap on loan-to-value to pre-2009 level. But prices are still lower than where they were a year ago.
Can Hong Kong do a better job of reinvigorating demand? Six years ago, I had considered a Singapore-style system where workers would be able to borrow for apartment purchases from their pension savings.
However, Hong Kong home prices were still frothy in 2019, having tripled over a decade. It wouldn’t have been the right time to introduce yet more buying frenzy in one of the world’s most unaffordable housing markets.
In today’s changed circumstances, however, Hong Kong could shorten residents’ path to home ownership, particularly for first-time buyers, “if the city unlocks the Mandatory Provident Fund (MPF), the city’s pension plan, for home purchases”, write Bloomberg Intelligence analysts Patrick Wong and Yan Chi John Wong. Their template, too, is based on Singapore’s Central Provident Fund (CPF).
The problem is that MPF is structured differently from CPF. Mandatory contributions in the South-east Asian city-state are a lot higher, and they’re steadily being increased.
A few years of work is usually sufficient to cover the bulk of an upfront housing payment, as well as the monthly mortgage. Using retirement savings for homeownership is a time-tested strategy for young workers to borrow from their asset-rich older selves.
Hong Kong, however, caps the compulsory monthly MPF at US$386, with equal shares for employers and employees. This is the principal source of retirement savings in the city. Voluntary contributions – over and above the mandated amounts – account for just 24 per cent of the money going into nest eggs.
Singapore offers a faster buildup of retirement savings. It also provides more predictability. Hong Kong’s MPF gains and losses are market-based. The annualised 3.6 per cent return on mixed-asset funds over the past 10 years has fluctuated between a high of 8.3 per cent and a low of 0.9 per cent.
In short, even if savers were allowed to dip into their MPF, it would take a long time – and a lucky streak of investments – for Hong Kong’s salaried workers to accumulate a balance of HK$1 million (S$172,130), the minimum upfront required to buy a HK$10 million first home.
Rather than tinkering with stamp duties or trying to lure overseas investors to the top end of its housing market, Hong Kong needs to fix the first rung of its property ladder. It’s placed too high and retirement savings are of no help in reaching it. BLOOMBERG
The writer is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia.
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