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. Last Updated: 07/27/2016

Property Value Fall A Tale of Caution

HONG KONG -- A long, steep fall in property values has wiped out the savings of a generation of homeowners in Hong Kong, fed political unrest and caused deflation that makes even Japan's falling prices look modest by comparison.

The Hong Kong Monetary Authority announced Thursday night that 22 percent of all residential mortgages are now larger than the current value of the properties they financed. The share of such mortgages that are "underwater," in bankers' shorthand, has jumped from 14 percent of mortgages in just one year.

Property market experts say Hong Kong's experience is a cautionary tale for homeowners in other financial centers, like New York and London. The steep runup in residential property prices here until 1997, followed by a 66 percent drop since then, offers a reminder that real estate prices do not always go up.

Johnny Lam, 46, a salesman here for a Japanese food importer, is an example of how badly a real estate investment can turn out. He and his wife, Connie, bought a $186,000 apartment in an outlying suburb in 1993, turned down a $218,000 offer in 1997 and then watched the apartment's value fall to $70,000.

With Hong Kong's economy stagnant since 1997, Lam stopped earning overtime pay and his wife lost her job, prompting them to file for bankruptcy in February and turn in the apartment keys to the bank.

In the last few days, there have been several tentative signs that the real estate market and the economy may have hit bottom and could start to recover.

The Hong Kong property market soared in the mid-1990s despite conservative bank lending practices. Regulators here let banks lend up to 70 percent of the value of a property, in contrast to practices in Japan, where banks sometimes lent 100 percent or even 120 percent of a property's value during the 1980s boom there.

Only now, with banks stuffed with deposits and finding few creditworthy borrowers, have mortgage rates fallen to the point that 92 percent of new mortgages are being issued at rates more than 2 percentage points below the prime rate, according to the Hong Kong Monetary Authority, which effectively serves as Hong Kong's central bank.

Most remarkable of all is how most Hong Kong residents, unlike Lam, have gone on making steep monthly mortgage payments for apartments that are now worth less than the mortgages, instead of mailing the keys to the bank, filing for bankruptcy and then renting another apartment for less.

"If anybody outside Hong Kong looks at it, they ask why people don't just walk away," said Ryan Tsang, a banking expert at Standard & Poor's.

The answer lies in the high savings rate of Hong Kong's people and the strictness of its bankruptcy statutes. Many people wealthy enough to buy an apartment in bubble times typically have other assets that a bank could claim in a bankruptcy proceeding to make up the difference between the value of the apartment and the balance due on the mortgage.

Some of the biggest frustrations from real estate losses are for people like Lam, who never saw themselves as speculators but lost their savings anyway.

"I wasn't thinking about the rise in the market," he said. "I wanted a place to live."