Property market bailouts a poor idea
That Chief Executive Carrie Lam Cheng Yuet-ngor rejected point-blank the idea of the government propping up the declining property market with support measures has undoubtedly disappointed quite a few. But she has to do so, as any government move to support the real estate market now would result in moral hazards that could translate into real damage to individuals and threaten the financial system’s stability.
Home prices in Hong Kong, the world’s most expensive and unaffordable housing market, took a turn in August after a winning streak of 28 consecutive months as a dimmer economic outlook caused by the ongoing Sino-US trade row kept homebuyers at bay, who also have been increasingly concerned about rising mortgage cost as the US Federal Reserve moves on with its tightening cycle.
Along with the decline in home prices comes the pressure from industry players for the government to shore up the market by removing some of the restrictive measures implemented previously to help cool down the then red hot market, including restrictive down payment requirements for mortgage loans. They are building up pressure on the government by forecasting steep falls of as much as 30 percent in home prices next year.
It is understandable that an increasing number of real estate brokers and executives from property developer companies have joined the chorus to sing the property market blues. They fret over their livelihoods. Property transactions (and thus brokers’ commission revenues) have been plunging as demand for properties have been falling at a pace much faster than that of home prices, thanks to homebuyers/investors’ penchant to chase rising prices and shun declining ones.
But with home prices having dropped by only 3.7 percent since August after doubling from their 1997 peak and tripling from their most recent trough in 2009, any government move to support the property market now would be interpreted as suggesting that home prices can only go up. This will encourage potential homebuyers/investors to enter the market even if prices are still in record-high levels. And a move to ease the restrictive down payment requirements for mortgage loans, as demanded by industry players, would enable buyers who are financially less capable to buy a home now with their financial capability being overstretched. These buyers will be in great danger of falling into a negative equity trap as property prices continue to fall.
Already, dozens of homebuyers who entered the market at the top have been fallen into and troubled by this trap. The cases of negative equity could only increase as the property market continues to normalize as home supply increases and the economic outlook deteriorates in future months. This will have dire consequences for the homebuyers concerned as well as the whole financial system. The government has every reason to be cautious in accommodating any demands from the property industry players.