Barclays Capital estimate that between mid-2007 and the end of 2010, Hong Kong borrowers took out new mortgages worth HK$300 billion. In a city with a limited supply of new homes, the explosion in mortgage lending – coupled with interest from mainland cash buyers – naturally drove a sharp rise in flat prices, which rose by 72% over the same period.
At the moment, average mortgage repayments are reasonably affordable as a proportion of monthly incomes. But at some point next year (2012) interest rate increases will threaten to push typical monthly repayment cost for new buyers above half of average household income.
Crucially that will disqualify many first-time buyers from the HKMC’s mortgage insurance program. Aft the moment close to 20% of borrowers take out mortgage insurance, which allows buyers to put up a down payment of just 10 % of their flat’s value.
Intially, knocking some first-timers out of the market is unlikely to have a huge effect on prices. but at the same time, higer margins over Hibor on new mortgages are likely to discourage existing borrowers from upgrading to a more expensive apartment.
As a result, the velocity of market activity is likely to decline, with transaction volumes falling. At some point, this slowdown will begin to erode confidence in future price rises, and investors will begin to sell in order to realize their gains.
Next year, expect a correction of 15% to 20%, which would push prices back down to where they where in August last year.