Bright spots stand out when going gets tough

PUBLISHED : Monday, 06 July, 1998, 12:00am
UPDATED : Monday, 06 July, 1998, 12:00am

There are not many people who see bright spots in the Hong Kong property market just now, or look for them for that matter. So here is an argument that things have been much worse in the past and, in at least one area, are not all that bad now.

Look at the chart below on the breakdown of bank lending in Hong Kong. It shows mortgages and loans to property developers as percentages of total HK dollar bank loans since 1978.

Narrow your focus on what happened in late 1980, just before an unsustainable credit bubble finally burst and took the property market down with it. There was a sudden drop in mortgage lending and an accompanying sudden jump in loans to property developers.

What happened was that although property prices were still rising, they did so on the basis of pre-sales alone. Real home purchasers could no longer afford the game. Various studies on affordability at the time showed that average monthly mortgage payments on the basis of published prices were as high as 200 per cent of average family income.

But property developers were misled by the pre-sales market and continued to push their development projects. Without revenue from completed sales to fund this activity they were forced to resort to the banks and their borrowings soared.

The pattern on the chart is a classic hallmark of a property boom and bust.

Now look at the right side of the chart and you can see that there is no evidence of any such thing at present. The latest figures still show mortgages up as a percentage of total lending while the figure for developers is flat. The current downturn in the property market has not produced a financial crisis of the sort that the last big downturn produced.

One can argue, of course, that mortgages are a much higher percentage of total lending now than they were in 1981 and this is a danger in itself. There would be reason for worry if there were signs of a big increase in foreclosures but these are not present.

People are walking away from their down-payments on Home Ownership Scheme flats but they are keeping up their mortgage payments. Even in 1981-83 banks could count on the fingers of one hand the number of mortgage defaults they were getting. You think twice as a homeowner when you sign a personal guarantee as part of your mortgage agreement.

Also, there is no reason for concern about the financial positions of big developers. Some of the smaller developers could be running into trouble now but the big boys have debt-to-equity positions that still run at an average of only about 30 per cent. They were much higher in 1981-83.

There are those who argue that the debt position of the developers is cloudier now because you cannot tell from their balance sheets how much debt is in their associates and because they have foreign-currency borrowings which do not show up in the Hong Kong banking figures.

This point could be conceded but there remains doubt that it would make much difference on the chart. It may seem like bad times but times have been worse.