Jake's View

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

PUBLISHED : Thursday, 21 March, 2013, 12:00am
UPDATED : Thursday, 21 March, 2013, 5:20am

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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.