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Massive increase in negative property equity in Hong Kong

According to the Hong Kong Monetary Authority, the city's banking regulator, the aggregate value of the outstanding mortgages in negative equity jumped to HK$6 billion at the end of September, from HK$1.7 billion three months earlier.

The increases come as brokers and analysts forecast further declines in home prices as the once-buoyant economy is hit by layoffs in the banking, retail and tourism sectors.

HSBC said last week it would lay off 450 of its Hong Kong employees. Hong Kong's government has announced that the city had entered a recession, complete with a rising jobless rate and the looming prospect of deflation.

There are concerns that the numbers in negative equity will increase as home values continue to fall. Hong Kong home prices surged some 40% toward the end of 2007 as buyers, enticed by low mortgage rates of about 3%, piled into the market.

Now, with the stock market draining investor wealth and banks increasingly reluctant to lend in the face of a tight interbank loan market, property brokers say homebuyers have disappeared from the market.

'This is a very sentiment-driven market, and I don't think we've seen the worst,' said K.K. Fung, managing director at broker Jones Lang LaSalle in Hong Kong, who predicts prices will fall an additional 35% next year and will only begin to rebound in the second half of 2010.

Leland Sun, chairman of Hong Kong-based Pan Asian Mortgage Company, predicted the number of underwater mortgages would continue to rise as property prices continue to fall.

At least the prospect of widespread defaults is slim, as Hong Kong homebuyers typically put down at least 30% of their home values to secure their loans. Also, analysts point out that many of the conditions in Hong Kong these days are fundamentally different from those during the Asian financial crisis of 1997-1998, when a flood of new housing supply hit the market, and home prices fell as much as 70%.

'People will usually pay their mortgage off first, and default on their credit cards and other unsecured loans. For most Hong Kong people, they still need a place to live, and so usually property will be the last thing they will miss a payment on,' said Sun.