Tuesday 11 November 2008

Negative equity hits 10,000 homeowners after price fall

Price slump means loans exceed market value of flats

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Negative equity hits 10,000 homeowners after price fall

Price slump means loans exceed market value of flats

Paggie Leung and Maria Chan
11 November 2008

More than 10,000 flat owners who bought their properties in the first seven months of this year have fallen into negative equity after property prices dropped significantly over the past few weeks.

Property prices have plunged more than 15 per cent compared with the same period last year, figures from Centaline Property Agency and Ricacorp Properties show.

This means those who bought flats with mortgages of 85 per cent or more of the purchase price now have outstanding loans that exceed the market value of their properties.

The Hong Kong Mortgage Corporation received a total of 13,590 mortgage insurance programme applications between January and July this year. Insurance is required for mortgages over 70 per cent.

The corporation refused to disclose further details. But most of these applications involved mortgage plans of at least 85 per cent, bankers said.

“Eight or nine out of 10 of these cases use mortgage plans of more than 85 per cent,” a banker who declined to be named said.

Those who bought flats with mortgages of 90 per cent or more were now in negative equity, he said.

If property prices fall a further 5 to 10 per cent they will be back to 2004 or 2005 levels, leaving many more people in the same trap.

The number of residential mortgage loans in negative equity peaked in June 2003 at the height of the Sars epidemic with 105,697 cases involving HK$165 billion, Hong Kong Monetary Authority figures show. The figure fell to its lowest level of just 936 cases involving HK$1.7 billion at the end of June this year.

So far, however, there has been no sign of increasing delinquency in mortgage loans.

Patrick Chow Moon-kit, Ricacorp Properties’ head of research, said it was inevitable to see more homeowners move into negative equity as property prices fell.

But the number was still “very small” and would not have a huge impact on Hong Kong’s economy.

“It’s unlike the [bursting] property market bubble in 1997,” Mr. Chow said. “People are using a small portion of their salary to repay their loan ... Also, many are not borrowing as much as before to buy a flat and they have more cash in hand nowadays - many still have HK$200,000 or more after paying the down payment.”

Mo Pak-hung, associate professor at Baptist University’s economics department, was optimistic the negative equity problem would not be as serious as in 2003 because most recent buyers were not speculators.

Wong Leung-sing, associate director at Centaline Property Agency’s research department, said most buyers had mortgage plans of 60 per cent meaning that they were less vulnerable to negative equity.

“Owners are repaying their loans every month,” Buggle Lau Ka-fai, chief analyst at Midland Realty, said.

“Unless property prices drop 20 per cent more, the unemployment rate continues to rise, interest rates go up, land is sold regularly ... otherwise it doesn’t really affect those who can pay every month.”