Lower home prices could be a blessing in disguise

Official surveys have shown that the decline in Hong Kong property prices has gained momentum since August. Major developers and property agents have revised their forecast to a fall in average home prices by up to 30 percent in 2019 from earlier projections ranging from 5 to 10 percent.

If you, like the Hong Kong Monetary Authority, still need further convincing that the property market has already entered a downward cycle, ask the property agents. They should know because their incomes are taking a big hit from falling prices and shrinking demand.

Take Midland Realty, one of Hong Kong’s largest property agents. Last week, the company issued a profit warning in the market, predicting a drop in earnings for 2018 from the year before when it reported a net profit of HK$193 million. In a statement, Midland said that earnings for the first 11 months of 2018 amounted to HK$45 million, or just 30 percent of the reported profits for a year earlier period.

The property market blues have prompted the government to consider abolishing some or all of the market-cooling measures introduced in recent years when the surge in home prices seemed unstoppable. Those measures, including the restriction on mortgage lending, higher tax on the purchase of second property, had produced little results.

The market took a turn in August because of buyers’ concern about rising borrowing costs and a slowdown in economic growth caused by the raging trade war between Hong Kong’s two largest markets, the United States and the Chinese mainland. For that reason, removing those market-cooling measures is not expected to have too much of an effect on reversing the downward trend in prices.

In reviewing the measures,it is important to bear in mind that the restrictions on mortgage lending were introduced not so much as a market-cooling measure but rather as a precaution to limit banks’ exposure to the risk of a fast-forming market bubble. Limiting the amount that can be lent in a mortgage loan to no more than 70 percent of the property’s value was designed to give banks a cushion to absorb the impact of a price crash.

As the momentum of the price decline is gathering pace, the greatly increased risk of a bursting of the property market bubble has made it all the more necessary to keep the mortgage loan ratio requirement in place rather than abolishing it.

An even greater risk is posed by the vastly expanded exposure of the moneylenders, many of them are associated with developers. Because they don’t have to comply with the banking rules, they can provide 100 percent financing to the so-called subprime homebuyers who are not qualified for bank loans. And many of these moneylenders did so to countless borrowers during the height of the property boom.

A substantial portion of the properties these moneylenders financed are the “nano” apartments in fringe locations. This type of properties is losing their value in the downturn faster than those in other market segments. As a result, many owners of these apartments who borrowed the full amounts from moneylenders to buy are finding themselves in the dilemma of negative equity. The temptation to default will intensify as home prices continue to fall.

The collapse of a large moneylender or several smaller ones could send shock waves that rock the banking system which is the lenders’ main source of funding.

It’s not all gloom and doom. While there is little the government can do to combat market forces, there have been some developments that can help to bolster investors’ confidence.

The most important development is a milder-than-expected increase in US interest rates as indicated by Federal Reserve Chairman Jerome Powell who reportedly signaled a “wait-and-see” approach after a probable interest hike later this month. Minutes from the Fed’s meeting show that the central bank could pause regular rate increases in 2019 out of concern about the impact of trade tensions and corporate debt on economic growth.

What’s more, the outflow of overseas capital from Hong Kong in the past several months has remained moderate while the exchange rate of the local currency against the US dollar seldom strayed beyond the band allowed under the linked exchange rate mechanism. This has greatly alleviated pressure on the government and banks to raise local lending rates to match that of the US.

Lower property prices, thus assured, are widely seen as a good thing for Hong Kong as long as the decline does not snowball into an avalanche.

The author is a current affairs commentator.