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Jake's View
PUBLISHED : Thursday, 21 March, 2013, 12:00am
UPDATED : 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

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

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caractacus
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.
rpasea
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.
HK-Explorer
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.
webbocybase
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
I suspect the next major economic downturn in Hong Kong would have more to do with events and conditions outside of Hong Kong.
HK-Explorer
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.
 
 
 
 
 

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