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13/06/2011

On Friday, the Hong Kong Monetary Authority (HKMA) tipped its latest bucket of cold water over the city's markets.

 
From now on, buyers of high-end properties will have to put up a down-payment of at least 40 per cent of the home's value. And if they are buying at the very top end of the market - properties worth HK$10 million or more - then they will have to put up a hefty 50 per cent deposit.
 
That's not all. If a buyer has the misfortune not to earn his living in Hong Kong, he will have to put up an even bigger down-payment.
 
Tough measures to cool home market, proclaimed the headline on a front page article in Saturday's South China Morning Post, which went on to describe the new rules as the toughest combined measures ever to damp down the city's red-hot housing market.
 
Well, maybe. But in reality, the measures were not aimed at calming the property market. Their real target was Hong Kong's banking system.
 
That's probably just as well, because experience shows these sort of administrative controls have little impact on property prices. After all, this is the fourth time since October 2009 that the HKMA has tightened its standards on property lending. And as the first chart shows, in the interval Hong Kong's home prices have soared by 37 per cent.
 
Increasing minimum deposits doesn't bring down property prices because Hong Kong home buyers aren't especially leveraged in the first place. According to the HKMA's latest survey, the average loan-to-value ratio on new mortgages in the city was just 54.5 per cent, so lowering the ceiling on luxury properties to 60 per cent isn't going to have much of an impact.
 
And slapping tougher rules on loans to out-of-town buyers doesn't achieve much either. The mainland buyers blamed for driving up local prices don't need mortgages. They pay cash.
 
In any case, despite all its talk about making homes more affordable, Hong Kong's government doesn't really want property prices to fall. Officials know full well that Hongkongers regard property as their main investment, and that any decline in prices would eat into the wealth of the city's vocal middle class.
 
So, back to the real target - the banking system. The HKMA has been badly spooked by the recent divergence between Hong Kong dollar deposits and loans.
 
With fixed 12-month deposits yielding just 0.2 per cent and the local currency tied to a weakening US dollar, depositors have been abandoning the Hong Kong dollar.
 
Instead, they have been switching into the yuan, which not only pays a slightly higher 0.6 per cent interest rate, but is appreciating against the Hong Kong dollar at a rate of about 5.5 per cent a year. As a result the growth rate of the Hong Kong dollar deposits has slumped from 15 per cent as recently as October to just 5 per cent in April.
 
Meanwhile, with the city's economy firing on all cylinders, demand for Hong Kong dollar loans has surged, with outstanding loans climbing by 14 per cent over the past 12 months.
 
As a result, the loan to deposit ratio of the city's banking system has leapt from 69 per cent in late 2009 to more than 80 per cent today.
 
That's raised concerns at the HKMA that the city's banks may be in danger of getting over-extended.
 
And it is not only the HKMA that has noticed the trend. A group of London-based hedge fund managers has also spotted the mismatch between rapid Hong Kong dollar loan growth and sluggish deposit growth. The group is betting that the resulting financial stresses may prompt the Hong Kong government to abandon its currency peg to the US dollar in favour of a link to the yuan.
 
Such a drastic step is extremely unlikely. As this column has pointed out before, there are all sorts of practical obstacles preventing Hong Kong from tying its currency to the yuan at any point in the foreseeable future. Instead, the HKMA will continue to introduce administrative measures like Friday's. These steps may not do much to bring down home prices - certainly they haven't so far - but then that really isn't their main aim.
 
Their real purpose is to discourage Hong Kong's banks from lending too readily, especially to the city's property sector. Whether they succeed remains to be seen.

SOURCE: SCMP



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