Weekend Property

Into the red: HKMA’s home loans guidelines for banks help ease negative equity pressures

More homeowners are discovering that the value of their property is lower than the outstanding mortgage loan, but even if there were a price slump, the severity of negative equity would be manageable, experts say

PUBLISHED : Friday, 15 July, 2016, 2:08pm
UPDATED : Friday, 15 July, 2016, 9:36pm

Are Hong Kong’s banks coming under pressure? This is a question that is rearing its ugly head as prices continue to fall and homeowners slip into negative equity.

Market watchers feel that the number of homeowners falling into negative equity is far lower than it was during the 2003 severe acute respiratory syndrome crisis.

Hong Kong saw negative equity cases rocket to a record 105,697 during the Sars epidemic.

The Rating and Valuation Department’s data in March showed home prices had fallen for the sixth straight month, by 1.3 per cent, meaning that Hong Kong’s once red-hot property prices had lost 11.7 per cent over a period of six months.

Negative equity occurs when the value of the property is lower than the outstanding mortgage loan.

The Hong Kong Monetary Authority (HKMA) said the number of negative equity cases went up 14 times to 1,432 in the first quarter of this year, a sharp rise from 95 cases as at the end of December last year. The figure was also the highest since the fourth quarter of 2011.

And pressure is also building on the market as the number of private homes under construction hit a record 13,300 units only in the first quarter, compared with 14,200 for all of last year, the Transport and Housing Bureau said in a report in the South China Morning Post.

In the report, the bureau estimated that 92,000 new private homes will come on the market in the next three to four years, an upward revision of 5,000 units from its previous quarterly report in April.

The latest figure on negative equity represents borrowers who are covered by the mortgage insurance programme (MIP) and bank employees on high loan-to-value (LTV) mortgage schemes.

These loans were mainly drawn down in 2015, with 90 per cent LTV ratio covered by the MIP, according to the Hong Kong Mortgage Corporation (HKMC). However, the negative equity figure is still well off the alarming levels seen in the past.

During the 2008 global financial crisis, more than 10,000 homeowners were in negative equity.

To boost new home sales, some developers have been offering high LTV mortgage loans to buyers, either through their lending arms or a second mortgage on an existing property.

“I believe the number of high LTV mortgages disbursed this way [through developers] is insignificant relative to the whole mortgage market, and that does not pose a substantive risk to the housing market,” says Dr Chau Kwong-wing, chair professor of real estate and construction at the University of Hong Kong.

Of course, we cannot rule out the possibility of a price slump but, even if it happens, the severity of negative equity would still be manageable
Nicole Wong, regional head of property research, CLSA

According to Chau, the new HKMA guidelines to banks for home loans are so far effective in hedging against the risk of properties going into negative equity.

Under the present mortgage rules, the maximum LTV ratio for homes intended for self-use and less than HK$7 million is 60 per cent, meaning homeowners must come up with the 40 per cent deposit, while the maximum LTV ratio under the MIP was reduced from 90 per cent to 80 per cent except for first-time buyers wanting a home for their own use. That means for a flat worth HK$5 million, buyers have to put down an initial deposit of HK$2 million.

In the worst-case scenario, Nicole Wong, regional head of property research at CLSA, estimates that the number of negative-equity cases will rise to around 15,000 if property prices see a 30 per cent slump from the peaks last year.

“Of course, we cannot rule out the possibility of a price slump but, even if it happens, the severity of negative equity would still be manageable,” she says.

Meanwhile, Ivy Wong, managing director of Centaline Mortgage Broker, says lenders are reluctant to foreclose homes unless the outstanding amount owed is considered seriously delinquent, meaning borrowers have not made monthly repayments for at least three months and are unable to afford future mortgage repayments.

According to the HKMA, there have been no residential mortgage loans in negative equity with delinquencies of more than three months since the first quarter of 2011.

“To banks, foreclosure is a last resort, which will only be used when all other options have been exhausted. They don’t want to force the sale of a property easily.”

A large number of foreclosed properties on the market means price falls would accelerate and this, in turn, would see more borrowers going underwater, Wong explains. “And that’s what banks don’t want to see.”

The number of foreclosed properties stood at about 130 in April, about double the number from last year.