Will banks raising their Hibor-linked mortgage rates take the heat out of Hong Kong’s property market? Probably not 【星之谷專欄－南華早報】

Raising the mortgage cap from 2.375 per cent to 2.625 per cent will result in a HK$520 increase in monthly payments on average, which is unlikely to deter prospective buyers, says Raymond Chong of StarPro Agency

Four of Hong Kong’s biggest commercial banks have raised their mortgage rates, following this month’s move by HSBC to tighten Hibor caps and drastically cut cash rebates as lingering economic concerns lead to more prudent risk measures.

According to local media reports, HSBC raised its Hibor-linked mortgage cap by 25 basis points, from Prime minus 2.75 per cent to P – 2.5 per cent, with the prime rate standing at 5.125 per cent. Hence, even though the prime rate has not changed, the effective mortgage rate has jumped from 2.375 per cent to 2.625 per cent. The cash rebate, meanwhile, has been slashed to 1 per cent from an all-time high of 2.1 per cent. Other big banks have reportedly followed suit.

Will this round of mortgage tightening put an end to the high-flying, yet resilient residential market in Hong Kong? Does this move herald the end of the decade-long cheap credit cycle? We don’t think so.
In terms of affordability, such tightening causes a minor uptick in mortgage payments for the average borrower. According to data from the Hong Kong Monetary Authority (HKMA), the average mortgage loan size in the city is around HK$4 million (US$510,000).

Raising the mortgage cap from 2.375 per cent to 2.625 per cent will result in a HK$520 increase in monthly payments (or HK$17 per day), which is unlikely to deter prospective buyers who need a “roof over their heads” from purchasing a flat.

Raising interest rates will tighten the minimum salary required to finance a house and raise the bar of the so-called “stress test”. For a loan size of HK$4 million, the minimum salary will have to increase by HK$1,036 in order to pass the debt service ratio requirement and stress test.

Given that Hong Kong is essentially at full employment, this should have a relatively minor effect on affordability. Currently, potential home buyers are required to pass a stress test prior to mortgage application.

Under existing rules, assuming an increase in interest rates of 3 per cent, the monthly repayment amount should not exceed 60 per cent of the mortgage borrower’s monthly income. Hence, the repayment ability of those who can afford a home should be resilient to mild rate hikes. That explains why there is almost no mortgage delinquency in Hong Kong.

With the mortgage rate at 2.625 per cent and inflation over 3 per cent, Hong Kong’s property market is still in a negative interest rate regime. Historically, negative interest rates serve as a strong support for housing prices and had fuelled escalation of prices in the past decade.

The question is, is such uptick in the interest rate a blip or the start of an emerging trend? As the US economy has shown signs of slackening, we believe the Fed will stick to its guns and lower interest rates after raising them nine times since 2017. But the pace of downward adjustment is expected to be gradual.

Hence, the path of least resistance for Hong Kong rates is still downward. Critics claim that the recent social turmoil in the city might trigger capital outflow, causing a potential credit crunch. However, the M1-M3 money supply suggests that such fears are unfounded. Hong Kong’s banking system is still blessed with ample liquidity which can underpin low interest rates for the foreseeable future.

One may ask: if the outlook is so benign, why are big banks raising mortgage rates in the first place? In my humble opinion, such rate increases have more to do with risk management and a shift in asset allocation than credit contraction. The mortgage market is notoriously a low-margin business for banks.

In the past few years of housing boom, banks had engaged in a vicious price-war by continuously cutting rates and increasing cash rebates to seize market share of mortgages. Even though the margin was razor thin, the true purpose was to lure customers to open mortgage accounts with the bank, and then cross-sell them with other bank products with higher yield.

The idea of this strategy was to “throw a sprat to catch a whale”, and it had worked well in the past few years. However, the looming economic and political outlook have prompted big banks to rethink their strategy and refocus on profit margin. By raising interest rates, banks can shrink their mortgage portfolio, freeing capital to expand high-margin business such as personal loans, insurance and investment products.

Banks have had a prosperous year in terms of mortgages, and most of them have already achieved or exceeded their 2019 target, so raising rates and calling it a day amid economic uncertainty is understandable.

Next year, when banks need to meet their new mortgage targets again, we expect a gradual downward reversion of current mortgage rates, especially if the US provides the lead.

If history is any guide, residential property prices in Hong Kong tend to rise over the long term despite periodic hiccups. Against the backdrop of social unrest and the ongoing US-China trade conflict, minor price corrections appear to be unavoidable.

That said, solid fundamentals will continue to stabilise home prices in the long run. Besides negative interest rates, housing supply has also fallen short of potential demand. New residential completions (both private and public) failed to satisfy demand spurred by household growth and new immigrants from mainland China.

The gap is expected to widen in the coming years. Unfortunately, the government has yet to come up with a concrete solution to tackle the long-standing housing problem.

Raymond Chong

https://www.scmp.com/business/article/3029985/will-banks-raising-their-hibor-linked-mortgage-rates-take-heat-out-hong