Hong Kong’s banks are in better shape than 1997 to weather a property crash, regulator says

Banks are lending less in mortgages while their capital base has been strengthened, which puts them in better position to withstand any downturns in property, the monetary authority’s CEO says

PUBLISHED : Sunday, 18 June, 2017, 2:52pm
UPDATED : Sunday, 18 June, 2017, 11:18pm

Hong Kong’s banks are better prepared than 20 years ago for a crash in the property market – even amid the world’s costliest apartments – because they are better capitalised and less exposed to real estate loans after the regulator forced them through eight rounds of mortgage tightening measures, the Hong Kong Monetary Authority’s chief executive Norman Chan Tak-lam said.

“[While] nobody can predict when the next crisis will arrive, Hong Kong’s financial sector is now well prepared for that,” Chan said in an interview with the South China Morning Post.

The city’s mortgages now make up 51 per cent of property values on average, reduced from 64 per cent in 2009 after eight rounds of tightening. Two decades ago, mortgages were 70 per cent of property values while the developer would lend 20 per cent.

“In 1997, many homebuyers only needed to pay 10 per cent of the value of the property,” Chan said. “When the property price dropped 10 per cent, these homeowners fell into negative equity.”

Home prices, which have surged for 13 consecutive months to record levels, are poised for declines this year as an unusually large pipeline of 10,000 apartments is due to come to market and the US Federal Reserve’s widely telegraphed interest rate increases mark the end of the era of cheap finance.

Hong Kong’s mortgage rates average 3 per cent currently, compared with 12 per cent in 1997.

Deutsche Bank predicted two weeks ago that Hong Kong’s property prices might plunge 50 per cent over the next decade while property agents are beginning to forecast a drop of 5 per cent in the next six months.

“The coming interest rate increases would add pressure on borrowers,” Chan said.

The chief executive of Hong Kong’s de facto central bank is seeking to assure the public that the city’s banking industry is sound while trying to warn off excessively exuberant property buyers, who had been packing sales launches.

Hong Kong’s average property price rose to a record in 1997, when the city’s sovereignty returned to China from Britain. The Asian financial crisis a year later hit the economy hard, leading to an 8.8 per cent contraction over five consecutive quarters, while the jobless rate soared to a record 8.5 per cent in June 2003. Then the severe acute respiratory syndrome epidemic broke out, plunging the city’s economy and property industry deeper into crisis.

Real estate prices slumped 66 per cent in March 2003 from the peak of October 1997, forcing 100,000 homeowners into negative equity, where the value of their properties was worth less than their mortgages.

To protect Hong Kong’s financial industry, the HKMA forced banks to strengthen risk management, bolster capital, slash non-performing loans and cut exposure to property loans.

Their average capital ratio now stood at 19 per cent, higher than global standards, while their bad-debt ratio was slashed to 0.7 per cent of total loans from 1.9 per cent in 1999, Chan said.

Hong Kong’s total banking assets have doubled to HK$20 trillion (US$2.56 trillion) over the past two decades.

“The growth was due to Hong Kong’s stable economic growth and the inflow of international investments,” Chan said. “The internationalisation of the yuan since 2009 also led Hong Kong banks to expand rapidly into yuan financing and trading.”

Fintech would drive Hong Kong’s banks to excel, he said, rejecting the critique that the city was lagging Singapore in using technology including artificial intelligence and big data analysis to provide faster and better services for clients.

“There are areas where Singapore is moving faster, but Hong Kong has also been quick in launching the sandbox and other measures to promote fintech,” Chan said.

Eight banks were already applying to test 18 fintech applications in the sandbox, the HKMA’s programme that let banks select small groups of customers for testing new fintech services before a full-scale launch, he said.