Hong Kong hit with mortgage curbs as property booms

Hong Kong real estate is often cited as the most expensive in the world, with Sydney not far behind. Both cities are grappling to control risks and have seen the inflationary impact of foreign investment — predominantly from mainland Chinese — on property prices. However, while the RBA has left rates on hold since August last year, Hong Kong's central bank has lifted the cash rate three times this calendar year. With little impact on property prices, more action is now being taken. 

Following its announcement on 12 May to curb lending to developers, the Hong Kong Monetary Authority (HKMA) has issued fresh guidelines to banks on a new round of prudential measures for home loans to strengthen banks’ risk management and resilience.

The HKMA is raising the risk-weight floor from 15 per cent by 10 percentage points to 25 per cent for new residential mortgage loans granted after 19 May 2017 by banks using internal ratings-based (IRB) approach to calculate capital charges for credit risk.

In Australia, only the four majors and Macquarie currently use the IRB model.

While APRA has announced measures to curb investor and interest-only lending, Hong Kong’s banking regulator is taking a different approach, targeting borrowers with multiple mortgages.

The HKMA is lowering the applicable loan-to-value ratio (LTV) cap by 10 percentage points for home loans extended to borrowers with one or more pre-existing mortgages, in addition to observing the existing requirement of lowering the applicable debt servicing ratio (DSR) limit by 10 percentage points.

Finally, the regulator has taken action against overseas buyer by lowering the applicable DSR limit for property mortgage loans extended to borrowers whose income is “mainly derived from outside of Hong Kong”.

The three measures were announced on 19 May and take immediate effect.

“The risk of overheating in the property market in Hong Kong continues to increase,” HKMA chief executive Norman Chan said.

According to the latest statistics of Rating and Valuation Department, property prices in March 2017 have surpassed the recent peak recorded in September 2015. Transaction volume for residential properties has increased by more than double from about 3,300 in January 2017 to about 7,000 in April 2017.

The regulator observed that 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”.

Given these developments, the HKMA considers that there is a need to introduce new measures to strengthen the risk management of banks.

“I would like to remind the public that, for most people, buying a property is not only one of the most important decisions in life, it is also a financial transaction entailing significant leverage through borrowing. Prospective buyers must be mindful of their ability to cope with the potential risk that may arise from possible changes in the property cycle as well as mortgage interest rates,” Mr Chan said.

“The HKMA will continue to monitor the property market closely, and will introduce appropriate counter-cyclical measures to safeguard the stability of the banking system.”

While Mr Chan flagged “risks of overheating” in the Hong Kong property market as a key driver of the new measures, his Australian counterpart – APRA chairman Wayne Byres – has a different agenda.

Rising property prices in Sydney and Melbourne have often been linked to regulatory measures introduced by APRA in 2014, and again earlier this year. However, in a speech last month Mr Byres made clear that APRA is “not setting out to control prices.”

“Property prices will go up and they will go down (even for Sydney residential property!). It is not our job to stop them doing either of those things,” he explained.

“Rather, our goal is to make sure that whichever way prices are moving at any particular point in time in any particular location, prudentially-regulated lenders are alert to the property cycle and making sound lending decisions. That is the best way to safeguard bank depositors and the stability of the financial system.”

[Related: APRA sounds alarm on commercial property risks]