Jake's View

Thursday, 21 March, 2013, 5:20am

Bank on it - doomsday not so nigh

Higher interest rates do raise risks for the city's property market but it's a long way from the end of the world – or even the Cyprus crisis

Jake van der Kamp jake.vanderkamp@scmp.com

BIO

Jake van der Kamp is a native of the Netherlands, a Canadian citizen, and a longtime Hong Kong resident. He started as a South China Morning Post business reporter in 1978, soon made a career change to investment analyst and returned to the newspaper in 1998 as a financial columnist.

Higher interest rates do raise risks for the city's property market but it's a long way from the end of the world.

Banks may be required to beef up capital as HKMA steps up review after ordering increase in risk weighting for residential business

SCMP, March 20

I can paint the doom scenario as well as anyone can. Here we have a red-hot residential property market with prices propelled to record heights by four years of extraordinarily low interest rates.

What will happen if interest rates now start to rise?

A thunderous collapse, that's what will happen, says the doom scenario. It could be bigger than the one we had between 1997 and 2003, when prices fell 65 per cent on average.

The market may have been overheated in 1997, but it didn't have ridiculously low interest rates pushing it up. There could be a lot more empty air under it this time when it starts to fall.

And what is more, there are indications that rising interest rates could be just around the corner.

The writing is on the wall now, and our whole financial system will be shaken if that wall speaks true. Doom, doom, doom, it's coming our way.

Right, that's the doom scenario, and now look at the first chart. It shows you that even in the worst of the fallout from the 1997 property crash, the three-month mortgage delinquency rate never exceeded 1.4 per cent.

It now stands at 0.01 per cent. Only one of every 10,000 mortgages is in delinquency. This is about what you would expect from slow probates and people who cannot pay because they have been sent to prison.

Mortgage obligations are honoured in this town.

But will they continue to be so if interest rates rocket up? That's the big question, and the answer is that undoubtedly the delinquency rate will rise and probably exceed previous levels.

So let us put this prospect into perspective. The second chart also shows you the three-month mortgage delinquency rate. It is now the blue line just crawling above the bottom of the chart. The red line above it is the overall three-month overdue or rescheduled delinquency rate for the overall banking system.

This stands at present at 0.41 per cent, which also isn't very high but is still 40 times higher than the delinquency rate for mortgages alone.

It seems to me, and possibly does to you as well, that perhaps our banks have more to worry about in the non-property element of their business than in residential mortgages.

And then we get the green line at the top of the chart. This represents the official capital adequacy ratio of our banking system, 18 per cent of applicable assets at present.

It seems to me we can run a huge increase in mortgage delinquency without our banks having to do as much as sneeze.

So, yes, I too think there is a danger to the property market from higher interest rates.

I also think our banks are fully aware of it and are already about as heavily fortified against it as you could expect them to be and as they always have been.

This town is no Cyprus.

jake.vanderkamp@scmp.com

This article appeared in the South China Morning Post print edition as Bank on it - doomsday not so nigh

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This article is now closed to comments

caractacus Mar 21st 2013
7:45pm

Hong Kong's only passing resemblance to Cyprus is the massive amounts of laundered and corrupt money flowing into the property market. Sooner or later prices must fall to a level which at least in part reflects a reasonable proportion of people's incomes. They might even begin to reflect a little sanity instead of the current reckless gambling. The banks are unlikely to suffer with down payments being so high. If those who speculated by paying too much lose out it is simply the operation of the market which was rigged in the first place by a deliberately engineered shortage of residential units and land. In a depressed market money does not disappear, it only changes hands. The banks and property developers keep most of their plunder.

coyrickel Mar 21st 2013
7:02pm

When equities on mortgages are high, there is no reason for people to default. The data will mean little in bad times. A sharp downturn will see a drastic fall for the worst. The banks should survive but I'm not sure about the general public.

webbocybase Mar 21st 2013
4:26pm

Much of what is said is true, but low levels of mortgage delinquency and, indeed, the majority of home owners not having a mortgage at all did not stop the market crashing 1997 - 2003. The current danger is that prices are unaffordable for many, so a rise in interest rates when it comes will pull down prices a little and sentiment will then do the rest.
Prices have overshot on the way up, and they will undershoot on the way down - that's how HK operates! Hopefully next time we won't have something like SARS to make the situation even worse, but it will be bad enough.

zreal Mar 21st 2013
12:24pm

I suspect the next major economic downturn in Hong Kong would have more to do with events and conditions outside of Hong Kong.

IRDHK Mar 21st 2013
2:57pm

There definitely will be a downturn. While the rest of the world has been sick HK has been strong. People see HKs strength and move their money here and focus their businesses on Asia. This is why the unemployment rate sits around 3% (close to natural rate).
Once Asia is no longer the favorite place the HK economy which is artificially high will have to shrink back a bit. Shrinking would be a good thing (as long as it is not you loosing your job) or people just become lazy and salaries become to high and costs go to high to compete.

cleareye Mar 21st 2013
11:40am

It would depend on which wall one is reading. Albert Einstein once said: So far as the theories of mathematics are about reality, they are not certain; so far as they are certain, they are not about reality. The U.S. government should also realize that substantial rate increase would cause a doomsday. Why would they take such an action? To rein in inflation? But is current inflation come from overwhelming investments and business activities, or simply lack of, choking supplies from demand? Through rounds of QE, the current U.S. money supply is mainly sitting in corporates' war chests, would increase in rates make a difference to them, or give them a better return by lending instead of investing? The U.S. economy is still anemic, if not dire. What would the FED gain from increasing interest rates drastically, to sustain the stubborn recession? The Japanese had maintained its interest rates between 0-2 percent for the past decade, and has now moved to reflationary tactics to stimulate its economy. Why not the U.S.? The biggest problem for the U.S. was undergoing a peak & trough cycle with cheap money, they should have increased the rates in 2005 to contain rampant speculations and to avoid the financial collapse. However, they had two wars to finance. If all things being equal, they should be lowering the rates to stimulate the economy, but they have no more room to maneuver. Hong Kong's doomsday is as speculative as an undetected meteorite hitting a major city.

rpasea Mar 21st 2013
9:35am

If the default rate was low after the '97 bubble when values plunged 65-70%, the banks here have absolutely nothing to worry about. An increase in interest rates should trouble bankers however as they will need to put their cash to work instead of getting free money to pay huge and unwarranted bonuses.

IRDHK Mar 21st 2013
10:10am

They will still have their big bonuses!! People will pay back the loans and the interest will easily pay the bonuses. HK is well positioned for executivebonuses.

IRDHK Mar 21st 2013
9:02am

Isn't mortgage delinquency almost impossible in Hong Kong? When someone buys a home they put 30% down and maximum they can borrow is 70%. Maximum home loans are 20 years.
a) Most people in HK do not have a mortgage. (unlike UK, US, Aus and pretty much everywhere else)
b) Most people with a mortgage have owned the house more than 5 years. Thus have less than 50% mortgage.
c) Yesterday the article said allot of people in HK have more than 1 mil HK in liquid assets (counter-balance against higher interest rates)
d) Unlike US the chance of delinquency is very low. Thus people with issues to pay back a bank should be able to modify the terms much easier than in US. there wont be the massive lines of people lining outside of a stadium to get new terms. Banks have tons of cash and should be fairly flexible.
So with low outstanding mortgages, strong banks, a government flush with cash I do not see default happening. Even the 1.5% delinquency that happened during the financial crisis should not happen again. Hong Kong is in a much better situation than that time.
With all this the probability of a 60% downfall is extremely low. People have the $$, demand for housing is there and supply is low. If prices dropped 105 there would be thousands of HK people rushing to buy property.