Memories revived of 1997-98 Asian crisis, when prices slumped two-thirds from peak
(HONG KONG) Hong Kong home prices, down almost a quarter from their five- year high in March, may drop further as the credit crisis drives up joblessness and threatens to spark defaults.
Not buying: A billboard advertising new HK properties. The number of housing units changing hands fell 79% in November - the biggest decline in at least 12 years'There's a real lack of funds,' Leland Sun, chairman of Hong Kong-based Pan Asian Mortgage Co, said at a Bloomberg forum last Thursday. 'Banks are unwilling to lend to other banks, let alone individuals and small and medium businesses.'
HSBC Holdings Plc, the city's biggest bank by branches, raised mortgage rates as much as 75 basis points last week - the most in a decade.
Increased risk has prompted banks to tighten credit even as benchmark borrowing costs fall worldwide, reviving memories of the 1997-98 Asian financial crisis when Hong Kong home prices slumped by two-thirds from their peak.
'Mass market home prices will ease down the curve rather than falling off the cliff,' said Nicholas Brooke, chairman of Hong Kong- based Professional Property Service Ltd. 'The fundamentals are so different this time' compared with the Asian crisis, he said.
Mortgage rates in Hong Kong have climbed even as the de facto central bank has cut benchmark borrowing costs in line with the US Federal Reserve.
Higher mortgage rates make it more expensive for homebuyers to borrow. This could trigger a further drop in home prices, already down 22 per cent since March, according to Centaline Property Agency Ltd.
Banks in Hong Kong are raising mortgage charges after having tracked six of the Fed's past nine benchmark rate cuts.
HSBC cut its best rate to a four-year low of 5 per cent on Nov 7.
The Hong Kong University Property Derivative Index shows investors expect a drop of as much as 30 per cent in property prices in the next year, Richard Wo, head of product services and training at Sun Hung Kai Financial Ltd, said in an interview with Bloomberg Television.
The number of homeowners with apartments worth less than their mortgages surged 174 per cent in the third quarter, the Hong Kong Monetary Authority (HKMA) said last month.
The number of housing units changing hands fell 79 per cent in November, the biggest decline in at least 12 years, according to the government.
Mr Sun at mortgage originator Pan Asian said 'negative equity' homeowners in Hong Kong might rise higher than in 2003, though he said people will keep paying their mortgages, as long as joblessness doesn't spiral. Homebuyers and banks may be concerned both about Hong Kong's economy, which contracted 0.5 per cent in the third quarter to put the city in its first recession since 2003, and the jobless rate - which rose to 3.5 per cent in October.
A further 6,000 jobs have been lost in the past six weeks, the South China Morning Post newspaper reported on Dec 1.
Sun Hung Kai Properties Ltd, Hong Kong's biggest developer by market value, had its target price cut by Citigroup Inc on expectations that prices will fall further.
Still, Sun Hung Kai told shareholders last Thursday that prices had stabilised in the past two weeks.
In 1997-2003, home prices had periods of stability, then fell further.
HSBC itself, which employs more than 21,000 people in Hong Kong, said last month that it is cutting 450 jobs in the city.
Standard Chartered Plc said on Dec 2 that it will fire 200 people, 4 per cent of Hong Kong employees.
'This aggressive rate hike comes across to us as severe risk aversion, unlike previous hikes, which were aimed at regaining a reasonable spread for the mortgage product in light of a rising Hibor,' Citigroup Inc Hong Kong-based analysts Tony Tsang and Marco Sze wrote in a Dec 2 research note.
Rising unemployment rates can mean an increase in people who can't service mortgages. With prices of some homes lower than the value of the loans they secure, banks may not be able to recoup the money they are owed when they sell apartments on which they have foreclosed.
'The latest rate hikes in mortgage interest rates, more job losses and weak retail sales figures suggest that the outlook for the property markets in Hong Kong will remain difficult,' Citigroup's Mr Tsang and Mr Sze wrote.
The Hang Seng Property Index, tracking the share of the city's biggest developers, has fallen 61 per cent in 2008, more than the 50 per cent drop in the benchmark Hang Seng Index.
Still, the mortgage delinquency ratio was unchanged at 0.05 per cent in October, the HKMA said last month. That compares with a ratio of 0.78 per cent in October 1998.
Peter Wong, an executive director at HSBC's Asia-Pacific unit, said economic conditions may dictate further mortgage rate increases.
Hong Kong mortgages carry interest at a discount or premium to the benchmark cost, the so- called best lending rate.
'We have not decided whether we will raise interest rates again,' Mr Wong told reporters in a briefing last week.
'That depends on the operating environment, and also on the credit and risk profile in the economy. We have just increased,' he said. -- Bloomberg
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