A Perfect Storm
Those thinking the property market in Singapore is going through tough times should take a look at what is happening in Hong Kong, where the situation has been described as being in free fall. In what appears to be a perfect storm for a property crash, the former British colony is facing the biggest crisis since 1997, with some experts predicting this will have even greater consequences. In the 1997 crash, property prices were slashed by almost half in just 12 months. So how bad is it in Hong Kong, what has caused it, and what are the hopes for the future?
The facts are quite startling:
- Home prices have dropped approximately 13% since September of last year
- Property sales are at a 25 year low
- 1,432 homes, worth HK$4.9 billion (S$852.5 million) are worth less than the amount paid for them as of the end of March. This compares to 95, worth HK$418 million, three months before
- Highest amount of negative equity since the 2009 global financial crisis
- Household debt in the territory is at a record high of almost 70%
Why there, why now?
It is easy to just point the finger at the slowing Chinese economy, but the root causes of this go a lot deeper, and is more complex. House prices have more than doubled since 2009, a trend that has often foretold of problems to come in countries across the globe. The HKMA (Hong Kong Monetary Authority), have introduced more than half a dozen measures to cool off the market in the last 7 years. They have cut the loan to value ratio on residential properties to 60% (and even as low as 40% for certain situations). This sets the limit on how much banks are allowed to lend on a property. The problem is however, that though banks are heavily regulated in Hong Kong, that certainly isn’t the case when it comes to finance institutions or indeed real estate developers.
To get around the bank’s restrictions, buyers have simply financed property purchases using loans from those institutions, sometimes borrowing up to 95% of the property’s value. The interest rates charged by these companies tend to be between 10 and 30% (as opposed to the banks’ 2%), with the lifespan of the loans generally being between one and five years (compared to the average bank loan lasting 25 years). It is thought as much as 10% of the Hong Kong market is financed in this way.
If that situation wasn’t bad enough, it is exacerbated by the fact that many properties are used as collateral for other non-regulated transactions.
What does the Future have in Store?
In the short term, foreclosures are likely to continue to rise, and rise sharply as more and more people are forced to default on their unsustainable high interest loans. Despite a slowing in house prices, they are still relatively high, but it will not take much for those to come spiraling down, according to Goldman Sachs, who would not be surprised to see current levels drop by 20% if conditions continue unchecked.
If interest rates remain relatively low in the coming months – as is expected to be the case, this should help prices while having the additional benefit of dampening demand. The longer term is maybe not so encouraging however, with rates expected to rise, triggering a further drop in property value.
For an industry which accounts for around 20% of the city’s economy, this will have a far reaching impact, and with what is happening in China and South East Asia in general, it doesn’t look like they will be on their own.
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