Government mortgages could rejuvenate housing sector

PUBLISHED : Saturday, 15 November, 2008, 12:00am
UPDATED : Saturday, 15 November, 2008, 12:00am

The credit crunch and financial turmoil are currently affecting many aspects of the building and engineering industry in Hong Kong. I would like to focus on two particular aspects that I think can be improved.

The demand for housing has been suppressed by the banking sector's reluctance to give mortgages. Lifting the mortgage interest rate to an artificially high level because of a paralysed inter-bank market and cutting the allowable debt-to-equity ratio, has kept many prospective buyers away except for cash buyers. The sluggish housing market has adversely affected sales of goods and services and held up many building and engineering contracts. We should seek ways of channelling the necessary funds to those who can afford to invest and behave prudently in the housing market.

The government should be willing to fund and manage mortgages directly, subject to certain sensible vetting criteria. As soon as the demand for housing is restored to a healthy level, building and engineering activities will pick up.

I would also like to touch on the threat posed to the bonding process in the building and engineering industry. A bond is a form of security in a building and engineering project provided to the project owner by a contractor. It consists of an undertaking by a financial institution to make a payment to the owner under certain circumstances (such as the contractor's failure to meet contractual specifications). Most economic recessions lead to a large number of contractors becoming insolvent. This highlights the importance of bonding undertaken by reputable financial institutions.

However, during the present downturn, some of these financial institutions have found themselves at risk of going bust, which would affect the issuing of bonds. A bond is a three-party arrangement based on the mutual trust between project owners, contractors and financial institutions. This mutual trusts can be restored by the government's direct intervention. It could facilitate the availability of trustworthy bonds to competent and financially stable contractors involved in building and engineering projects.

Benny K. B. Kwok, Central