September 14, 2012 / 10:58 AM / in 5 years

HK curbs home loans to prevent bubble after Fed stimulus

HONG KONG (Reuters) - Hong Kong’s de facto central bank has ordered banks to curb home loans to borrowers with more than one mortgage to prevent the city being flooded with hot money after the United States announced an aggressive new stimulus plan to spur growth.

The former British territory has among the most expensive residential property prices in the world, driven higher in recent years by voracious demand from rich buyers from mainland China.

But the runaway real estate market has created festering social and political problems, and forced the Hong Kong Monetary Authority (HKMA) into uncharacteristic action in a territory known for its open economy.

In another step taken on Friday, the HKMA said it would restrict the maximum length of a mortgage to 30 years. Some banks had been offering home loans of up to 40 years.

“That’s exactly what we had been expecting,” said Alfred Lau, property analyst at Bocom International. “This is also sensible, to increase the down payment requirement for non-occupied units. Obviously it’s for investment demand. This is the right direction.”

In earlier moves, the HKMA introduced restrictions on the maximum amount that people can borrow on high-value homes, and a tax penalizing the fast resale of homes to deter speculators. Properties resold within six months of purchase can attract a tax as high as 15 percent of the entire transaction price.

HKMA chief Norman Chan said he was acting in response to the U.S. stimulus measures, renewed signs that Hong Kong’s red-hot property market will overheat and to maintain the stability of the banking system.

For people borrowing on a second property, the HKMA said it was lowering the loan-to-value ratio, or the amount of a second home’s purchase price that people can borrow, to 30 percent, if the loan was based on the borrower’s net worth.

If the borrower’s main income comes from outside Hong Kong, the buyer will have to make a bigger down payment.

Home prices are a key focus of the administration of Hong Kong’s new leader, Leung Chun-ying, a former property surveyor who took office on July 1. He has pledged to introduce more public-rental and subsidized housing, including a controversial plan to restrict the sale of some property plots to Hong Kong citizens and permanent residents [ID:nL4E8K627X].

Hong Kongers complain that mainland Chinese buyers have been flooding the city’s property market with cash, accounting for a record 51 percent of purchases in last year’s third quarter.

The Federal Reserve kicked off another aggressive stimulus program on Thursday, known as QE3, saying it would pump $40 billion into the U.S. economy each month until it saw a sustained upturn in the weak jobs market.

Hong Kong, with one of the world’s most open economies and a property market that is easy to enter, has low transaction costs and no capital-gains tax. That makes the city’s housing market a popular target for “hot money” when liquidity enters the global economy, as expected with QE3.

Additional reporting by Christina Lo and Twinnie Siu; Editing by Anne Marie Roantree and Simon Cameron-Moore

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