• Thu
  • Oct 30, 2014
  • Updated: 1:43am
Monitor
PUBLISHED : Friday, 15 March, 2013, 12:00am
UPDATED : Friday, 15 March, 2013, 4:37am

New step may not help banks but it does hurt homebuyers

Increase of 0.25 percentage point in mortgage interest rates would make homes even more unaffordable for struggling families

BIO

As the writer of the South China Morning Post’s Monitor column, Tom Holland attempts each day to make sense of the latest developments in business, finance and economic affairs in Hong Kong and mainland China.
 

Wednesday's move by HSBC and Standard Chartered to raise the interest rates they charge on new mortgages was no surprise.

Bankers had warned an increase would be inevitable after the Hong Kong Monetary Authority last month ordered them to increase the amount of capital they hold against new residential mortgages to at least 15 per cent of the loans' value.

Considering that Hong Kong's banks had previously set a capital weighting of less than 10 per cent on their mortgage portfolios, the HKMA's move pushes up the capital costs of their mortgage lending significantly.

That cost increase has now been passed on to homebuyers in the form of a 0.25 percentage point mortgage rate increase, pushing the interest rate on a typical new loan up from 2.75 per cent to 3 per cent.

There's a paradox here. The HKMA ordered the city's banks to hold more capital against their mortgage books precisely because it is worried that mortgage rates will rise.

It's a distant prospect. US interest rates, to which Hong Kong's rates are tied, look set to remain at an effective rate of zero for at least the next two years, and to rise only slowly after that.

But as monetary authority boss Norman Chan Tak-lam points out, US rates will certainly go up at some point over the next 25 years, which is the average lifespan of new mortgages in Hong Kong.

And when US rates do rise, Hong Kong mortgage rates will go up in lockstep.

That's going to make servicing their payments difficult for many households. Last month, with the typical mortgage rate at 2.75 per cent, mortgage payments took up half the average household's income, according to Centaline's affordability index.

So if the US Federal Reserve were to increase its Fed funds target rate from 0.25 per cent currently to 3 per cent - a shade below its average over the past 20 years - servicing a home loan would eat up the average family's entire monthly income.

Our average family could be forced to default. And that could inflict a loss on the bank which granted the mortgage, which is what bothers the HKMA.

Whether requiring banks to hold more capital against their mortgage loans will help is doubtful, however.

For one thing, lenders are already supposed to stress-test their mortgage applicants' ability to sustain payments in the event of a steep rise in interest rates.

And for another, the 15 per cent capital requirement will only apply to new loans, not to the banks' existing mortgage books.

But the HKMA's move does have one clear effect. It has already pushed up the interest rates on new mortgages by 0.25 percentage point, which is an increase of almost a tenth.

In other words, the cost to the average family of servicing a new mortgage on a typical flat will climb from 50 per cent of their monthly income to 55 per cent.

That is a painful increase, one sizeable enough to make buying a home of their own even less affordable for many families.

So what the HKMA regards as a prudential move to strengthen bank balance sheets in case of a rise in mortgage rates in the future has had the effect of pushing up mortgage rates in the present, making homes even more unaffordable for struggling families.


Allan Chiang, the privacy commissioner for personal data, yesterday gave a telling insight into why he supports government proposals to conceal the identity card numbers of company directors from public view in the Companies Register.

"The present system is not satisfactory because there is no control," Chiang said. "Anyone who pays HK$22 can obtain the information."

The problem, it seems, is that the public can actually get access to public information in a public registry.

tom.holland@scmp.com

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This article is now closed to comments

HK-Explorer
It is a grand misconception that there are any affordability issues in Hong Kong amongst those who own homes or have the ability to buy them. It is well known that most people have no mortgage in Hong Kong. No-one has more than 70% outstanding on their mortgage due to needing to place 30% down. Most people who do have mortgages will have already paid off a large chunk of the remainder.
The real issue is that people without the ability cannot get a private home. These people are very vocal about the high price of housing. The Hong Kong is bowing to the pressure of these people by trying to show policies that give the impression of lowering house prices and give First time Home buyers a better chance to get into the private market.
But as tom rightfully says by artificially pushing up interest rates these people cannot buy the houses anyway even if the prices do drop. Thus making the policy pointless.
People should not think for 1 second the government is trying to stop negative equity. They are not. It is purely political the changes that have been put in place. HK within the next 15 years will not have a negative equity issue like the US did. The US had low down payments which gave people the reason to walk away when prices dropped. HK has high down payments meaning people will stick it out even if prices drop. This is great because it stops prices dropping to quickly.
I assume jve, babyhenry and BMR are trying to lower prices should drop so they can jump int
impala
IRDHK, I have no illusion that there is anything I could say or do that would lower prices. I don't even wish so. Nor do I have any plans to buy HK property by the way.

I agree that Hong Kong has no problems with leverage, and this does not resembles the US prior to 2008 in any way. This is not that type of bubble (if a bubble at all), not in the sense of speculative leverage. I have commented before on that last month, when Mr Holland wrote a column entitled '50pc property slump would see 57,000 in negative equity' - which echoes your entirely correct remark that negative equity is not the big concern here. I agree.

But that does not mean that we don't have an affordability problem and it does not mean that we don't risk sharp correction in home prices when certain things change, especially mortgage servicing costs. There is little comfort knowing that the LTV on my mortgage is only 50% when the servicing cost on my HKD 4m mortgage (on a HKD 8m flat) shoots up because the mortgage reference rate (be it HIBOR or other) goes up by 2 pct (in absolute points I mean). And yes, that won't happen tomorrow, but it may happen by 2015, or 2017, and mortgages are generally 20~30 year engagements. There lies the potential problem: not with the principal or negative equity, but with the loan servicing burden. I hope we will see a soft landing of all this, but the HKMA is right to signal there are risks, especially for people buying now, and to try to manage them.
impala
Yes, it will make mortgages more unaffordable. That is precisely the point - the HKMA has (much belatedly) concluded that at current price-to-income levels, the average family buying an average home is far from prudent, especially on a time horizon longer than a couple of years. So it is doing what it can to suppress that demand, out of concern for the families that face the interest rate risk, and out of concern for the banking sector, which faces a default risk if (no, when) interest rates go up.

Making such mortgages unaffordable is precisely the point, and entirely sensible. And let's not forget that the most likely eventual effect of these policies is actually a decline in house prices, which will make them more, not less, affordable.

The sad reality is that HK homes already are unaffordable by pretty much any affordability measure you can think of (price-to-income, net rental yield, price-to-rent etc). The only thing that they still have going for them is an illusion of affordability thanks to amazingly low US interest rates because of exceptional circumstances in that economy. Today the SCMP reports analyst estimates that the 0.25 pct hike in mortgage rates may cause a 15-20% decline in house prices. You would wonder what decline the models these predictions are based on will forcecast when interest rates go up by 0.5, 1.0 or, as you suggest, 3 pct. 40pct? 60 pct? We will find out soon enough.
babyhenry
Well said...
Stopping them people from jumping in the bandwagon in the illusion that they can actually afford it in the next 25 years is simply a smart move, if not..... those who jump in now will cry hell when reality hits them even harder in the face.
mymak
Come on Tom, 'making homes even more unaffordable'. Unaffordable is unaffordable. It seems just too easy for all financial journalists to try and further strengthen their arguments through an attempt to be seen as champions of the people. Delete the last paragraph and stop being such a woos.
 
 
 
 
 

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