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Hong Kong reforms risk overheating high-priced property market

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Via Financial Times

Hong Kong’s chief executive Carrie Lam has been keen to focus on economic discontent rather than the political drivers of the territory’s worst crisis since the end of British rule more than 20 years ago. Her prime target: lifting more Hong Kongers on to the property ladder.

Ms Lam announced a series of measures last week that included seizing land from private landlords to build public housing and relaxing mortgage requirements for first-time buyers.

Hong Kong-listed real estate stocks jumped as a result, with developers adding about $4bn to their market capitalisations, as investors focused more on the boost to demand than any unlocking of supply.

But the government’s desire to support homebuyers signals a reversal after years of attempts to damp demand — and has raised concerns from analysts that it could overheat a housing market that is already ranked as the world’s least affordable.

Under the changes to mortgage requirements, first-time buyers can borrow up to 90 per cent of the value of a property worth as much as HK$8m (US$1m) — up from HK$4m. They can use 80 per cent leverage to buy a property worth as much as HK$10m, up from HK$6m.

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David Ng, an analyst at Macquarie Capital, said the changes were a surprise boost that could put a floor under developers’ shares in the fourth quarter. But he added that in the face of an economic slowdown, it was a “dangerous move” that could boost prices in the secondary market, which are only 5 per cent off their record high of June.

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Yafei Tian, a banking analyst with Citigroup, said loosening mortgage requirements ran counter to a decade of caps on loan-to-value ratios from the Hong Kong Monetary Authority, the city’s de facto central bank, which were supposed to curb runaway prices. These restrictions had the effect of “pricing a lot of people out of the market”, she added.

While Ms Lam’s new policy was well intentioned, Ms Tian said, it came at a time when property prices were already elevated thanks partly to a decade of steady demand from mainland Chinese buyers.

For property groups run by the territory’s tycoons, recent stock market gains are a welcome respite from a price rout driven by anti-government protests over a proposed law that could have seen criminal suspects extradited to mainland China. The bill has since been withdrawn, but protesters’ demands have broadened to include democratic reforms amid increasingly violent clashes with police.

Even after the latest fillip, shares in Sun Hung Kai and Wheelock Properties, two of the territory’s biggest developers, are down more than 13 and 11 per cent, respectively, since the end of June.

The other plank of Ms Lam’s housing plans is boosting housing supply to help keep a lid on prices. This will be a challenge. “There really isn’t much out there” that can change the supply enough to fix the imbalance with demand, said Christopher Yip, analyst at Standard and Poor’s.

He pointed to a dearth of available flats and a surplus of demand driven by Hong Kongers less willing to live with their parents after marriage, as well as steady immigration from the mainland.

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A UBS analysis of property market bubbles worldwide, published last month, ranked Hong Kong as the most expensive among 25 global cities. The territory’s median home price has risen to almost 21 times the median household income, according to public policy group Demographia. Meanwhile, government data show that the average wait for public housing provided to low-income households has risen to five and a half years.

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To improve access, Ms Lam plans to seize about 700 hectares of land over the long term, under the territory’s Land Resumption Ordinance — a huge increase on the 20 hectares that Citi estimates has been taken into public hands under that law over the past five years. But landowners must be compensated for assets taken by the government, and many of the agricultural plots being targeted have been snapped up by developers.

In 2017, a CGS-CIMB Securities report calculated that farmland held by four developers — Sun Hung Kai, Henderson Land, Cheung Kong and New World Development — could be built out to provide 150m square feet of gross floor space. That is enough to meet nearly a decade of estimated demand in Hong Kong with flats much more spacious than the average, or to cover the entire country of Monaco six times over.

But David Webb, a Hong Kong-based activist investor, cautioned that agricultural plots in Hong Kong were often scattered and took time to consolidate and rezone. Greater blame for the housing shortage, he said, lay with the government, which has in the past limited land auctions to support property prices.

“It’s not so much the developers are hoarding land but that they and the government are in cahoots over the supply,” he said, pointing to local tycoons’ extensive representation in the 1,200-member election committee which chooses Hong Kong’s chief executive.

“Because of that structure, the government has to respond to the wishes of tycoons,” said Mr Webb. “In practice, there are a lot of inefficiencies baked into that system until we democratise the election committee and [Hong Kong’s] legislative council.”

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