“Grandpa Fortune” completely removed the property market, followed by the Hong Kong Monetary Authority's “Five Punch Axe”

After the Financial Secretary of the Hong Kong Special Administrative Region Government, Mr Chan Mao-po, announced the complete “elimination” of the property market in the “Budget”, the Hong Kong Monetary Authority (HKMA) immediately launched the “Five Punch Axe”.

On February 28, shortly after “Grandpa Chan” Chen Maobo announced the “withdrawal” of the property market, the HKMA announced the “Countercyclical Macroprudential Supervision Measures for Property Mortgage Loans”, issuing guidelines to banks to revise countercyclical macroprudential supervision measures and other relevant regulatory requirements applicable to property mortgage loans.

The HKMA said that real estate prices have continued to be adjusted recently. Official residential property prices fell 7% for the full year of 2023, and fell further by 1.6% in January 2024, with a cumulative adjustment of more than 20% compared to the high level in 2021. Residential property transactions remained low, with an average monthly average of 3,584 transactions in 2023, a decrease of 4.5% year-on-year. The situation in the non-residential property market is similar. The average price of office buildings fell by about 7% in 2023. Market data showed that the vacancy rate of Grade A office buildings rose to about 16% at the end of last year. Furthermore, the outlook for the peripheral and local economies continues to face many uncertain factors.

After careful analysis, the HKMA believesOn the premise of continuing to maintain the stability of the banking system and ensure proper management of mortgage business risks, there is room to revise countercyclical macroprudential supervision measures for property mortgage loans and adjust other regulatory requirements related to real estate loans as appropriate:

First:The maximum mortgage ratio for private residential properties worth HK$30 million or less was adjusted to 70%; for private residential properties worth HK$35 million or more, the maximum mortgage ratio was adjusted to 60%. To avoid a sharp drop in the applicable mortgage ratio, the mortgage ratio for properties worth between HK$30 million and HK$35 million will be gradually reduced. Furthermore, the maximum mortgage ratio for non-private residential properties was raised from 50% to 60%.

Second:The maximum mortgage ratio for non-residential properties (including office buildings, shops, industrial buildings, etc.) was raised from 60% to 70%.

Third:The maximum mortgage ratio for property mortgage loans based on “asset level” was raised from 50% to 60%. This amendment applies to residential and non-residential properties.

Fourth:The US Federal Reserve recently stated that the US interest rate hike cycle may be coming to an end, and there is a low chance that Hong Kong's mortgage interest rate will rise further for some time. In view of this, the HKMA believes it is appropriate to suspend the implementation of the stress test requirement for property mortgage loans assuming a 200 basis point increase in interest rates.

Fifth:In June 2017, the HKMA tightened the financing ratio for property development projects. In view of the current situation in the real estate market, the HKMA believes it is appropriate to return the upper limit of the relevant ratio to the level before 2017. In other words, the maximum financing ratio for overall property development projects was raised from 50% to 60% of the expected value of the property after completion. Among them, the upper limit of the land price cost financing ratio was raised from 40% to 50%, and the upper limit of the construction cost financing ratio was raised from 80% to 100%. Furthermore, additional capital requirements relating to banks' risk exposure to developers providing high-yield mortgage real estate were also abolished.

The HKMA notes that all of the above amendments are effective immediately and apply to property transactions for which temporary sales contracts are signed today or later.The HKMA also stressed that it will continue to keep a close eye on market developments and will introduce appropriate measures to ensure the stability of the banking system in response to the latest situation in the property market.

Author: Shen Daban

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