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Hong Kong steps up efforts to cool red-hot property market

A man descends on an escalator near private housing estates in Hong Kong October 31, 2013. REUTERS/Bobby Yip

By Clare Jim and Saikat Chatterjee HONG KONG (Reuters) - Hong Kong took fresh measures to cool one of the world's most expensive real estate markets on Friday, reducing the amount of money home buyers can borrow and capping the amount of debt they can take after house prices hit a record high last year. The central bank's steps come ahead of an expected U.S. interest rate rise this year and a day after Asia's richest man, Li Ka-shing, who controls they city's second-largest developer, said smaller home prices in Hong Kong would remain firm. Home prices have risen nearly 35 percent since 2012, when the city's leader, Leung Chun-ying, took power with a pledge to make housing more affordable. Frustration over the city's widening wealth gap and soaring home prices have sparked widespread protests in Hong Kong. "If the U.S. raises interest rates, Hong Kong will follow suit...We need to be mindful that the risk is not that far away; the risk is getting closer and larger," Norman Chan, chief executive of the Hong Kong Monetary Authority, the city's de facto central bank, told reporters. The city's currency is pegged to the U.S. dollar and an increase in U.S. interest rates would cause domestic rates to rise as well, increasing mortgage payments for home owners. Fuelled by record high property prices and ultra low interest rates, borrowers have taken on more debt, pushing the household debt to GDP ratio to a high of 64 percent. The HKMA cut the amount of money home buyers can borrow to 60 percent of the property's value, from 70 percent for homes priced below HK$7 million (586,003 pounds), a step aimed at curbing speculative demand for smaller apartments. The debt-servicing ratio for second-home buyers would be lowered to 40 percent for second-home buyers, from 50 percent, he added. Some analysts questioned the longer-term impact of the measures. "The impact of this will be very short-lived as interest rates are still very low and Hong Kong's inflation remains high relative to the region, which means effective real interest rates are still in negative territory," said Raymond Leung, an economist at ANZ in Hong Kong. Since October 2009, the government has taken a series of steps to curb prices, including a 15 percent property tax on foreign buyers, mortgage restrictions and taxes on quick resales. However, price pressures have continued to pose policy challenges for officials. The HKMA also reduced the amount of debt that borrowers can service to 40 percent from 50 percent for all mortgage loans taken for non self-use properties. All measures will be effective immediately. Home prices in the former British colony have surged about 130 percent since 2008 due to low interest rates, a supply shortage and ample liquidity. The moves, which were announced after the market closed, will likely pressure Hong Kong's stock markets and property shares on Monday. The property sub-index <.HSNP> on Hong Kong's stock market fell 1 percent on Friday ahead of the measures, underperforming the Hang Seng index's <.HSI> 0.3 percent drop. The sub-index has risen around 5 percent so far this year as expectations of further price increases at home have helped offset concerns about China's cooling real estate market. (Additional reporting by Donny Kwok, Michelle Chen, and Farah Master; Editing by Anne Marie Roantree and Jacqueline Wong)