Norman T L Chan: New round of countercyclical prudential measures for
property mortgage lending
Address by Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority, to
the media, Hong Kong, 14 September 2012.
* * *
1. I am going to announce a new round of countercyclical prudential measures for
property mortgage lending.
2. Since the introduction of the fourth round of tightening measures for property
mortgage loans by the Hong Kong Monetary Authority (HKMA) in June 2011, the local
property market quieted down somewhat - but for just about seven months. The property
market began to heat up again in February 2012, with significant increase both in transaction
volume and prices. Cumulative growth in property prices was as much as 13% compared
with the beginning of this year.
3. The evolution of the property market cycle in Hong Kong is affected by many
factors, including the external environment. With the third round of quantitative easing
announced by the US Federal Reserve last night, there can be more capital inflows through
the US banking system into the emerging markets. Moreover, Europe has earned some
respite from its debt crisis following the announcement by the European Central Bank of its
bond-buying programme and related judgment by Germany's Constitutional Court. So the
sentiment in financial markets is likely to stay calmer for a while. Against this background, the
risk brought by the continued heating up of the Hong Kong property market on the banking
sector will rise again. To enhance risk management of banks, the HKMA has just issued a
set of guidelines to banks, requiring them to tighten the underwriting criteria for mortgages
where borrowers already have one or more properties under mortgage.
4. Under these new measures, when handling new applications for mortgage loans for
residential, industrial or commercial properties from borrowers who already have one or more
properties under mortgage, banks must adopt the following three requirements:
First: for mortgage loans assessed based on the debt servicing ability of a mortgage
applicant, the maximum debt servicing ratio (DSR) shall be lowered from the current 50% by
10 percentage points to 40%. Accordingly, the maximum stressed DSR shall also be lowered
correspondingly from the current 60% by 10 percentage points to 50%.
However, an applicant with just one property with outstanding mortgage loan will not be
affected by this new measure if the new mortgage loan is for self-occupied purpose, or for
the replacement of an existing property.
Second: for mortgage loans assessed based on the net worth of a mortgage applicant, the
maximum loan-to-value (LTV) ratio shall be lowered from the current 40% by 10 percentage
points to 30%.
Third: for mortgage applicants whose principal income is derived from outside Hong Kong,
the applicable maximum LTV ratio shall be lowered by 20 percentage points, instead of the
current 10 percentage points.
5. Based on the experience in Hong Kong, borrowers with multiple outstanding
mortgage loans have higher level of indebtedness and leverage. During property market and
economic downturns, the chance of default for this group of borrowers can be significantly
higher than those with only one property under mortgage. In view of this, the HKMA
considers it necessary to require banks to further tighten the underwriting criteria for
mortgage loans to borrowers with multiple property mortgages to reduce the risk of banks.
6. Besides, the HKMA notices a recent trend of lengthening average tenor of new
mortgage loans. The average tenor for new mortgage loans now is 25 years, which is three
years longer than that of 22 years in 2009. Some banks have extended the maximum tenor
to even 40 years. Prolonged loan tenors will not only increase credit risk of banks, but may
also weaken the ability of borrowers to withstand interest rate risk. In particular, when
mortgage rates return to more normal levels, borrowers with a loan that already stretches to
30 or even 40 years simply cannot seek to reduce their monthly instalment payment burden
by extending the tenor, and may therefore face financial difficulty. Therefore the HKMA has
now required banks to set the ceiling for the maximum loan tenor for all new mortgage loans
to not more than 30 years.
7. The above measures take effect immediately. However, loan applications in respect
of property transactions with provisional sale and purchase agreements signed today or
earlier will not be affected.
8. Mr Arthur Yuen, our Deputy Chief Executive, will explain the details of these
measures later.
9. When introducing measures to tighten the underwriting criteria for mortgage loans,
the HKMA has always strived to strike a balance to minimise the impact on end-users,
particularly first-time homebuyers. Although we have already introduced five rounds of
prudential measures on mortgage lending, we have sought to ensure that purchasers of
residential properties at a value of HK$6 million or below for self-occupied purpose would still
be eligible for a maximum LTV ratio of 70%. In addition, purchasers who meet the eligibility
requirements will be able to apply for mortgage loans of up to 90% LTV ratio under the
mortgage insurance arrangements. According to figures provided by the Hong Kong
Mortgage Corporation Limited, the value of properties involving mortgage loans with a 90%
LTV ratio averages at around HK$3.2 million. Therefore, I believe that the measures of the
HKMA will have minimal impact on first-time homebuyers.
10. Changes in the property market cycle are affected by a host of internal and external
factors, including land supply, interest rate movements, changes in household income as
well as economic and financial market developments in Europe and the US. In view of the
highly uncertain internal and external environments, the HKMA will continue to monitor the
market situation closely and introduce appropriate measures in response to changes in the
property market cycle to safeguard banking stability.