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Old before their time

SCMP June 28 2004

One thing in Hong Kong ageing even faster than the population is the stock of residential buildings. What is worse, the depreciation in value of the properties is being accelerated by the financial system. This has grim implications for many owners, which will end only when banks (and the government's mortgage corporation) end their cosy relationship with developers.

In 1995, 53 per cent of Hong Kong's private housing stock was less than 15 years old, and only 23 per cent was more than 25 years old. By the end of this year, housing older than 25 years will have risen to over 40 per cent, and the percentage over 30 years to around one-third. The ageing process will continue to accelerate.

Elsewhere in the world, ageing is not such a concern, provided buildings are reasonably maintained. In other countries, banks give mortgages as a percentage of assessed value and on a buyer's ability to service the debt. But in Hong Kong, what matters most to banks is the age of the building.

To developers, nothing matters more than their ability to sell at top prices, made easier by the availability of mortgages for 80 per cent or more of a home's value, payable over 25 years or more. The banks' own loans are often topped up by developers, who themselves borrow from the banks. Purchasers of older buildings get less desirable terms. They usually must repay their mortgage within a period of 40 years minus the age of the building. On that basis, potential buyers of one-third of Hong Kong's private dwellings can expect to get mortgages of no more than 10 years.

The excuse that the banks use for adjusting the term of a mortgage to building age - the cost of maintenance - is mostly nonsense. Reasonably well-managed buildings have no specific life span. For sure, plenty of buildings are appallingly maintained, due to the incompetence of the management company or the unwillingness of owners to co-operate. The sorry tale of Amoy Gardens brought this to public attention in a tragic manner. The prejudice against older buildings is partly also a consequence of the land leasehold system.

But the biggest issue for older flats is not management but mortgage financing. The consequences are serious for those looking to sell older flats to finance their retirement, or to pass on a sizeable inheritance. The banks' mortgage policy is forcing home prices to depreciate, which is contrary to the oft-made claims that houses for owner occupation are a safe investment. In fact the main beneficiaries of discriminatory financing, apart from developers, are not the owner-occupiers but cash-rich investors in old investment properties.

Take, for example, the Mei Foo Sun Chuen development in Lai Chi Kok - where some buildings are more than 30 years old. Mei Foo was one of the first, and is still one of the largest, middle class, mass housing developments. It has an established reputation and good transport access. But because of the impact of age on mortgage availability, prices per square foot there are now only around $2,100.

Yet, monthly rental income from Mei Foo flats is around $10 per square foot - as much as new buildings worth $3,300 per square foot. Older buildings also often have a higher percentage of usable floor area. In sum, for rental purposes, old buildings face little discount compared with new ones.

Favouring new buildings does not make much sense for banks, unless it is accompanied by more profitable lending to developers. For banks, connections seem more important than commerce.

It is now possible, however, that banks will be forced to change their attitudes. The supply of new flats is set to dwindle, and mortgage margins are minuscule. Demographics are fundamentally altering the demand for accommodation. This will create even greater competition to cut margins, unless banks improve their financing terms for older buildings.

Meanwhile, when considering purchasing a flat, buyers should try to calculate into the cost the relative depreciation likely to occur on new buildings. But that is not easy: there is no data tracking the price-age link. However, Mei Foo illustrates the point. Over 30 years, its price relative to comparable new buildings appears to have fallen by 50 per cent. But that now makes it a bargain. If you can afford the down-payment, buy old buildings, not new ones.

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