Hong Kong businessman Raymond Chiu says he has perfect credit and is prepared to spend about HK$16 million ($2 million) on a 1,000-square-foot apartment in the city’s Mid-Levels residential area. There’s just one catch. The government requires a 50 percent down payment.
That’s “really putting us off,” said Chiu, 45, who owns an information technology consulting company. “I run a business so cash flow is important. It’s frustrating because this is non-negotiable, though I have perfect credit history.”
Prices of high-end apartments, defined as those larger than 1,000 square feet or costing at least HK$10 million, have gained less than the broader market since the second half of 2012 as buyers in Chiu’s price bracket have been hardest hit after the government raised minimum down payments six times over less than three years as part of curbs to make homes more affordable.
The slowing price growth in high-end apartments is the first sign that efforts to temper rampant speculation that has fueled a surging housing market are working even as it stings luxury developers and potential homebuyers. Broker Cushman & Wakefield Inc. forecasts that prices of homes valued at more than HK$10 million will fall about 3 percent in the fourth quarter, extending a 3 percent drop so far this year, while those selling for less will be little changed.
“The luxury segment has taken the first and the most direct hit,” said Buggle Lau, chief analyst at Midland Holdings Ltd., Hong Kong’s biggest realtor by branch numbers. “The measures were aimed at driving the speculators away and they have certainly achieved that, but many people wanting to buy for their own use are also affected.”
An influx of wealthy buyers from mainland China, mortgage rates close to record lows and a financial-services sector that has thrived thanks to fundraising by Chinese companies helped fuel a 250 percent increase in luxury-home prices from 2003 to the beginning of 2012, outpacing the 150 percent gain in mass-market homes, according to statistics compiled by Savills Plc. The London-based broker defines luxury homes as those with at least 1,000 square feet (93 square meters) or value of at least HK$15 million.
Hong Kong home prices are the world’s highest in a Savills survey of 10 cities, including London, New York and Tokyo. The value of luxury properties will drop as much as 5 percent in the second half after a 3.2 percent decline in the first three months of the year, according to Savills. Prices in the mass market will see no change after increasing 1.7 percent in the first six months, the broker said.
Sun Hung Kai Properties Ltd., a developer of luxury residential projects, plans to build more, smaller apartments because of a change in buyers’ appetites, Victor Lui, the company’s deputy managing director, said in September. The company, one of Hong Kong’s two-biggest developers by market value, reported lower profit from sales for the year ended in June.
There were about 86,000 luxury homes — or units of at least 100 square meters (1,076 square feet) — in Hong Kong at the end of 2012, according to statistics from the government. That represents about 7.7 percent of private homes in the city. About 24 percent of the 10,149 new homes completed by developers in 2012 were larger than 100 square meters, government statistics show.
The gap between the top end of the market and the cheaper bracket narrowed last year as the government’s mortgage tightening started to impact the luxury segment. Prices of mass-market homes rose 20 percent in 2012, almost double that of luxury homes, according to Savills. Prices of luxury homes began to decline after the government in October 2012 slapped a 15 percent tax on all non-resident buyers as it sought to stem the inflow of Chinese capital into the property market.
“For a while, Chinese buyers were the main driver for luxury homes,” said Thomas Lam, Hong Kong-based research director at broker Knight Frank LLP. “When you raise buying costs for them, of course it takes away a large part of the demand.”
Mainland Chinese buyers accounted for an estimated 8 percent of private home sales in the city, a former British colony returned to Chinese rule in 1997, in the third quarter of this year, down from a record 25 percent in the fourth quarter of 2011, according to Centaline Property Agency Ltd. Since October 2010, the Hong Kong Monetary Authority, the city’s de-facto central bank, has raised the minimum down payment required for home purchases over HK$10 million to as much as 60 percent from 30 percent, and to 50 percent for those from HK$7 million to HK$10 million. The most recent round took place in February.
That month, the government doubled stamp-duty taxes for all properties over HK$2 million, with new tax rates ranging from 1.5 percent for properties valued below HK$2 million, to 8.5 percent for those priced above HK$21.7 million.
“The extra stamp duties and mortgage rules are like progressive taxes,” said Vincent Cheung, Hong Kong-based national director of valuation at Cushman & Wakefield. “The higher the property value, the higher the tax rates and the tighter the mortgage rules. Of course this would impact luxury properties the most.”
Hong Kong’s government won’t cut back property curbs until there’s a “steady supply” of new housing, Chief Executive Leung Chun-ying said in June.
There were 607 sales of homes worth over HK$12 million in the third quarter, according to statistics compiled by Centaline. The number is the lowest since the first quarter of 2009, according to the Hong Kong-based realtor.