QE3

Hong Kong Adds Curbs to Cool Home Prices as Fed Starts QE3

Hong Kong has widened efforts to cool home prices that have gained almost 90 percent since early 2009, as the U.S. Federal Reserve’s third round of quantitative easing risks fueling asset bubbles in the city.

Businessweek,

16 September, 2012

The Hong Kong Monetary Authority will limit the maximum term on all new mortgages to 30 years, Norman Chan, the de-facto central bank’s chief executive, told reporters on Sept. 14. Mortgage payments for investment properties can’t be more than 40 percent of buyers’ monthly incomes, from the current 50 percent, he said.

The curbs came after the Hang Seng Property Index completed a six-day, 11 percent rally on optimism the Fed’s QE3 program would fuel inflows to the city, which tracks U.S. monetary policy because of a currency peg to the dollar. Record low mortgage rates, an influx of buyers from other parts of China and a lack of new supply have underpinned the housing market, prompting Hong Kong Chief Executive Leung Chun-ying to announce plans in the past month to accelerate land sales and give preference to local buyers in some projects.

“Recent renewed signs of heating in the property market have been acknowledged by the HKMA,” Kelvin Lau, an economist of Standard Chartered Plc in Hong Kong, said. “It remains to be seen whether this will be enough to defuse medium-term upside price pressures, especially in view of the perceived supply shortage, still-ample liquidity, and strong domestic and cross- border fundamentals.”

Shares Rise

The nine-member Hang Seng Property Index extended last week’s gains, rising 0.2 percent as of 9:49 a.m. to the highest since August 2011. That takes its advance this year to 28 percent, more than double the 12 percent advance in the benchmark Hang Seng Index over the period.

Cheung Kong (Holdings) Ltd., the city’s second-biggest developer by market value, rose 1.1 percent to HK$115.20, the highest in 13 months. Sun Hung Kai Properties Ltd., the biggest, advanced 0.8 percent to HK$112.70.

The introduction of QE3 “will create the potential for renewed influx of capital into Hong Kong,” Chan said. “We have to stand ready for it.”

The central bank also raised the minimum down payment on investment properties for buyers who derive their income from outside Hong Kong. Investors using their assets -- not income -- to borrow can now only take out loans for as much as 30 percent of a property’s value, Chan said. The restrictions are effective immediately.

“The new measure will deter speculative and investment demand and the yield for property investors will be lower,” said Raymond Yeung, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd.

Weekend Sales

The city’s Financial Secretary John Tsang also said on Sept. 14 that QE3 may push up Hong Kong home prices and the government won’t hesitate to introduce more property curbs if needed.

The 15 largest estates in the city recorded 44 second-hand sale transactions over the weekend, compared with 30 the prior weekend, Midland Holdings Ltd. (1200), Hong Kong’s biggest publicly traded real estate company, said in an e-mailed statement yesterday. The low-interest environment, extended by the introduction of QE3, is encouraging renters to buy, executive director Vincent Chan said in the statement.

Restricting Homebuyers

Buyers from other parts of China made up 36.8 percent of all new sales by value in the first quarter, down from 37.9 percent in the previous three months, according to Midland. The proportion reached 53.9 percent in the third quarter last year, the realtor said.

Leung said on Sept. 6 he will restrict homebuyers of two building sites the government plans to sell to local residents, a week after announcing a 10-point package to rein in prices including making more land available to developers and speeding up the building of public housing.

“Without policy intervention, QE3 will further heat up the Hong Kong property market,” David Ng, a Hong Kong-based analyst at Macquarie Securities Ltd., wrote in a note after the HKMA’s announcement. “Excessive price growth not only hurts affordability, but will further weaken the political clout of the government.”

The city’s chief executive, who was elected in March by a committee of mostly businessmen, professionals and lawmakers, has pledged during his campaign to address a widening wealth gap and concerns that housing is becoming unaffordable for the general public.

1997 Peak

The government has had to tweak demand and supply through additional property transaction taxes, higher mortgage down payments and by releasing more land to developers as Hong Kong’s currency peg to the U.S. dollar pushed borrowing costs to a record low and prevents the de-facto central bank from using monetary policy.

The number of home transactions rose 42 percent in August from a month earlier, the biggest increase since March.

The central bank raised the minimum down payment for some mortgages in June last year, the third time since August 2010, with borrowers now having to put down 40 percent for homes costing more than HK$7 million ($902,000). In 2010, the government introduced an additional stamp duty on residential units sold within two years of purchase.

Hong Kong home prices have risen 14 percent this year, according to a Centaline Property Agency Ltd. index. They fell 4 percent in the last three months of 2011, the biggest quarterly drop since the global credit crisis, after the government’s mortgage restrictions and as China’s economy began to slow.

Hong Kong’s home prices have now surpassed their peak in October 1997, which marked the start of a 70 percent decline to August 2003, according to the Centaline index. They have soared 240 percent since that trough nine years ago.