Analysis: Lessons from the Hong Kong mortgage market

We live in a world of ever-increasing interconnectedness. Globalisation and the growth of international financial markets means an event in one country can have ramifications in another. The global financial crisis proved just how risky this can be.

Ten years on from the worst financial crisis since the Great Depression, markets remain connected and so do their regulators.

The increasing layers of regulation we are seeing across the globe are a direct consequence of what happened in 2008. In Hong Kong, long considered the world’s most laissez-faire economy, GDP growth contracted from 6.4 per cent in 2007 to 2.5 per cent in 2008.

The response was macro-prudential policy — a drastic measure that Australia has been adapting too in one form or another since 2014.

But for Hong Kong, the lending curbs started back in 2009 and went hand-in-hand with a steady stream of new infrastructure projects to boost economic growth and job opportunities. Hong Kong has no central bank or independent monetary policy as its currency is pegged to the US dollar.

However, the Hong Kong Monetary Authority (HKMA) acts as a de facto central bank and regulator for the financial system. For this reason, Hong Kong has relied on macro-prudential policy more than other nations like Australia, where the RBA cash rate is the common lever to spur or slow growth.

Following the Asian Financial Crisis in 1997, Hong Kong’s property prices fell by around 70 per cent. But the city is now locked into a long-running property boom that many fear will end in a crash. Over the 12 months to April 2018, the average price for a home in Hong Kong increased by 20 per cent.

According to the Bank of International Settlements (BIS), the HKMA has introduced seven rounds of macro-prudential measures since October 2009, mainly by gradually lowering the caps on the LTV ratio and debt service ratio (DSR) and by extending the prudential target from luxury homes to investment properties, and later to those where borrowers repay their debt with foreign income or have multiple mortgages.

But the impact of these mortgage curbs has been mixed, particularly when it comes to LVR caps.

“Although we find that the tightening of LTV caps would reduce property price growth marginally, the policy effect on the property price gap and property transactions is statistically insignificant,” according to the BIS.

“Statistical evidence for Korea and Singapore also supports the conclusion that LTV caps have a limited impact on property prices.”

Yet the Hong Kong government continues to fight an uphill battle against skyrocketing property prices by curbing mortgage lending.

If you look at the rhetoric coming out of the HKMA, it bears startling resemblance to the messages coming from APRA or the RBA:

“The risk of overheating in the property market in Hong Kong continues to increase,” HKMA chief executive Norman Chan Tak-Lam said in May last year.

“The keen competition for mortgage business in the banking sector has heightened the risk of overheating in the property market and weakened the resilience of banks to cope with a downturn in the market.”

If you thought the lending curbs in Australia were bad, Hong Kong has gone to the extreme — anyone looking to purchase an investment property will need a 50 per cent deposit. When you consider the average property costs HK$8.08 million ($1.34 million), that’s $670,000 cash up front.

While these restrictions pose no problems for the uber rich, of which there is no shortage in Hong Kong (the city has more Rolls-Royce cars per capita than anywhere else on the planet), they have created problems for those without half a million in the bank. As a result, non-bank lenders or “shadow banks” have started to fill the gap that traditional heavyweights like HSBC, Bank of China and Standard Chartered can no longer fill. Property developers have also joined the party.

According to Reuters, home loans granted by the dozen or so financing units of Sino-Land Company Ltd more than doubled in 2016 from the year before to HK$1.02 billion, in a year when turnover nearly halved and profit dived by nearly 25 per cent.

Other top developers, including Cheung Kong Property Holdings Ltd (controlled by Hong Kong’s richest man, Li Ka-shing), Sun Hung Kai Properties Ltd and Henderson Land Development Co Ltd, also have financing units.

Among all of this, Hong Kong’s mortgage broking industry looks very different to ours. A few intermediaries exist and digital comparison sites proliferate, but Hong Kongers generally find money on their own.

However, one of the largest mortgage businesses in the city-state is mReferral Mortgage Brokerage Services, which has been operating for 18 years. 

The brokerage is a joint venture between real estate agency Midland Holdings and CK Hutchison Holdings, a conglomerate valued at $62 billion. 

According to mReferral, which is accredited with almost 50 lenders, it’s responsible for originating one in every five mortgages in Hong Kong and claims to have helped over 300,000 borrowers.

Technology plays a big role — the broker has its own app and allows borrowers to apply for a loan directly from its website. It has also developed the mReferral Mortgage Rate Index (MMI), which reflects the weighted average mortgage rate that home buyers may obtain according to the approved mortgage rate of customers.