Stock market uncertainty and the US Fed hike will see banks being more conservative when valuing property for financing and buyers delaying purchases

On 23 February 2022, Hong Kong further relaxed the mortgage insurance plan (MIP) ceiling from HKD10 million to HKD12 million (80% LTV), making second-hand flats selling in that range instantly more attractive.

According to the Land Registry, as at 16 March 2022, 17 related transactions had been recorded in the Top 10 popular estates over the previous two weeks. Five were under-valued, and their buyers may have to make up the shortfall.

According to Centaline agency statistics, from 23 February to 10 March, 17 transactions in this price range were recorded for Kornhill, Taikoo Shing, South Horizon, Whampoa Gardens, Laguna City and Caribbean Coast.

However, the HSBC online valuation system showed that the properties’ valuations ranged from HKD9.78 million to HKD11.73 million, and five were undervalued.

The difference between the transacted and valued prices ranges from HKD90,000 and HKD510,000 (-0.8% to -4.5%). If the banks used the valued price as the basis for the loan approval, the buyer would have to pay the difference.

Kornhill, Taikoo Shing, Laguna City & Caribbean Coast

Whampoa Garden

South Horizons

There were five instances in Whampoa Garden and five in South Horizon. The most significant was Unit F, 14/F, Block 29, South Horizons, a 3/Br with 656 sq. ft. saleable area. It sold at HKD11.28 million on the 10th of this month, and if the buyer planned to undertake an 80% MIP mortgage, the loan amount would be HKD9.024 million, with a downpayment of HKD2.256 million.

Based on HSBC’s online valuation of only HKD10.77 million for the above unit, the valuation is HKD0.51 million or 4.5% lower than the transaction price. If the bank approved 80% of the mortgage at the valuation price, the loan amount would only be HKD8.696 million, and the first payment required for the buyer will increase by 13% to HKD2.584 million.

According to the Rating and Valuation Department, the private residential price index was 388.9 in January, down about 1.14% MoM, falling for four consecutive months; however, the relevant figures have not yet reflected the market impact of the pandemic’s 5th wave. Online bank valuations are generally two to four weeks behind actual market conditions.

?

US Federal Reserve officials voted on 16 March to lift interest rates and pencilled in six more increases by year’s end, the most aggressive pace in more than 15 years, in an escalating effort to slow inflation that is running at its highest levels in four decades. In this initial hike, the Fed raised its benchmark federal-funds rate by a quarter percentage point to between 0.25% and 0.5%, in the first rate increase since 2018.

The Hong Kong Monetary Authority then raised its benchmark interest rate by 25 basis points, saying it wants to maintain stability in the financial system amid heightened market volatility.

On 17 March, the base rate (P) rose to 0.75% from 0.5%, the HKMA said in a statement on its website. The rate moves in lockstep with the Fed’s rate since the Hong Kong dollar is pegged to the US currency.

However, HSBC and SCB banks announced that they would not change their best lending rates (P). Their decision allowed the economy some breathing room as it is throttled by the worst outbreak and tightest restrictions since the pandemic began. The HKMA also said in a statement that experience shows the Hong Kong dollar interbank rates may not necessarily rise in tandem with the US.

On March 18, the Hong Kong Economic Times reported that at least 85 flat owners had lowered their asking prices, and 10 of them had dropped from 1.5% to 12.3%. Sellers fear local banks will eventually follow the Fed and hike their rates, which will increse buyers’ repayments. That increase would slow the market as buyers take more time to save money for their homes.

Sellers will cut their prices to make faster sales, and buyers will think that they might not be able to sell at a profit in future due to the uncertain economic situation and increasing interest rate.

Buyers should compare two or three bank valuations of the flats they intend to target and be extra careful to ensure they can repay the mortgage.

Information from HKET/Memfus Wong/28 Hse

Thank you