Time to free market from mortgage limit
The question of whether Hong Kong's residential mortgage ceiling should be lifted is attracting debate again and it is not about to go away soon.
The Government so far has not made much comment on whether it might be time to do away with the 70 per cent financing limit, for the good reason that it has no intention of making the change.
It adopted the ceiling in 1991 as a way of stopping a property boom from going too far and endangering the financial position of the banks. At the time, 90 per cent financing of new homes was common, as developers sought ways of boosting prices further. There were even schemes for roundabout financing of the remaining 10 per cent.
The official view now is that the 70 per cent financing limit worked well in limiting excesses last year and that much of the relative financial health of the Hong Kong banking system regarding mortgages at the moment can be attributed to keeping the brakes on at that time.
Why take it away now and run the risk of having to impose it again at some future point when the Government is already accused of too much stop-and-go in its financial policies? The banking system's problem at the moment, however, is not too much Hong Kong dollar lending but too little of it. This is likely to be exacerbated soon with fewer loans to developers, which at present account for about 23 per cent of the banking system's loan book.
The developers are sitting on the sidelines at the moment, selling what they can and not building much while they wait to negotiate lower lease-conversion premiums with the Government. Their gearing, already generally low, will go even lower, and if the banks are to make up this shortfall they will have to look in part at doing more mortgage business.
The banks' argument is that they do not need the Government to impose prudence on them. They are prudent enough on their own and have been for a long time. They are more conservative than the market when assessing the value of flats on which they are being asked to grant mortgages, and they do not routinely grant 70 per cent financing in any case.
This is clearly borne out by the Government's own studies, which show that 52 per cent of all homes in the private sector carry no mortgage and that mortgage-service costs work out to an average of less than 30 per cent of household income in the remainder. These figures are much lower than is commonly thought to be the case.
The 70 per cent financing is reserved for new residential projects, normally in big developments where there is reasonable marketability of the property. In older, less-marketable, buildings even 50 per cent financing can be difficult to get.
And this is the key to it all. If financing terms were made easier for the big new developments, there would be some incentive for developers to get back to work. Excess is not a problem at the moment and any relaxation of the limit could have a disproportionate effect in stimulating development activity again. But it is not likely to happen any time soon.