LCQ20: Cases of residential mortgage loans in negative equity
22.3.2023

Following is a question by the Hon Kenneth Lau and a written reply by the Secretary for Financial Services and the Treasury, Mr Christopher Hui, in the Legislative Council today (March 22): Question: It has been reported that the latest data from the Hong Kong Monetary Authority indicates that as at the end of the fourth quarter of last year, the number of cases of residential mortgage loans in negative equity (negative equity cases) reached 12 164, representing a surge of nearly 22 times quarter-on-quarter and hitting a record high in almost 18 years since the first quarter of 2005, and the amount of money involved in the negative equity cases also increased by 21 times quarter-on-quarter from $3,006 million to $66,252 million, hitting the highest level since the fourth quarter of 2003. In this connection, will the Government inform this Council: (1) whether it knows, among the negative equity cases, the number of those in which the owners concerned only owned their self-occupied properties, and the total amount of loans which were not repaid by such owners; (2) whether it has assessed the negative impacts brought about by the continuous increase in the number of negative-equity properties on Hong Kong's economy (including cash loss, investment confidence, and even the development of the industrial and commercial sectors); if so, of the results; (3) whether it has plans to reduce the number of negative-equity properties to a specific level, so as to mitigate the impacts brought about by negative-equity properties; if so, of the details; (4) as there are views that the drop of more than 15 per cent in residential property prices last year has inevitably caused some first-time homebuyers using the Mortgage Insurance Programme (MIP) offered by the HKMC Insurance Limited to become negative-equity property owners, whether the Government knows, among the negative equity cases, the number of those in which MIP was used, as well as the total amount of such mortgage loans and the total amount of outstanding loans; whether the Government will suitably adjust MIP in the light of the market situation; if so, of the details; if not, the reasons for that; and (5) as there are views in the community that in order to avoid a further drop in property prices which will lead to a continuous increase in the number of negative equity cases, the Government should expeditiously relax the various demand-side management measures targeted at the property market (commonly known as "reduce the harsh measures"), whether the Government has set objective criteria for reducing the harsh measures and made assessments and preparations (including the formulation of contingency plans) in respect of the timing, strength, priority and public expectations for reducing the harsh measures; if so, of the details (including such criteria and the considerations in setting the criteria); if not, the reasons for that? Reply: President, Regarding the various parts of the question, in consultation with the Hong Kong Monetary Authority (HKMA) and the Housing Bureau, my reply is as follows: (1) The increase of about 11 600 cases of residential mortgage loans (RMLs) in negative equity recorded in the fourth quarter of 2022 was mainly because residential property prices declined further by 7.3 per cent during the quarter after falling 8.5 per cent in the first three quarters of 2022. These negative equity cases were primarily related to bank staff housing loans or RMLs under the Mortgage Insurance Programme (MIP), which generally have a higher loan-to-value (LTV) ratio. Since bank staff housing schemes and the MIP require the relevant properties to be for self-use purpose, the properties of these negative equity cases are self-occupied. Based on the market values of the mortgaged properties, the current average LTV ratio of the RMLs in negative equity is 104 per cent. In other words, the outstanding loan amount exceeds the current market value of the mortgaged property by 4 per cent on average. (2) and (3) The increase in the number of RMLs in negative equity is mainly caused by fluctuations in property prices. Considering that the vast majority of the relevant borrowers continue to make payments according to schedule, and that property prices have stabilised since early this year, it is not expected that it would cause significant impact on the local economy and the property market. The HKMA will continue to monitor the situation of RMLs in negative equity. (4) In respect of mortgage loans under the MIP, about half of the negative equity cases pertain to mortgages under the programme's extended coverage that became applicable in October 2019. While the applicable property value caps of the MIP have been adjusted, borrowers are still required to meet specific eligibility criteria, including stringent requirements on repayment ability. These include meeting a maximum debt-to-income (DTI) ratio of 50 per cent as well as the stressed DTI ratio imposed by banks. First-time homebuyers who cannot meet the stressed DTI ratio will be subject to premium adjustment based on relevant risk factors when they apply for loans with a LTV ratio of up to 80 per cent or 90 per cent. For borrowers with mortgage loans exceeding an LTV ratio of 80 per cent, the MIP imposes additional eligibility criteria, including that the applicants must be first-time homebuyers and regular-salaried. Although mortgage loans in negative equity have increased due to the decline in property prices in 2022, the quality of MIP loans remains satisfactory with a delinquency ratio of only 0.01 per cent as of end-December 2022. The MIP seeks to offer a risk-based solution to help citizens purchase their homes, and the programme amendments introduced in recent years can provide appropriate assistance to first-time homebuyers and people wishing to upgrade their homes. Potential homebuyers should consider their own needs and repayment abilities before making decisions, and should carefully assess and manage the risks involved. (5) The Government has introduced the demand-side management measures for residential properties to suppress short-term speculations, external demand and investment demand through increasing transaction costs. These measures aim to stabilise the residential property market and to accord priority to home ownership needs of Hong Kong permanent residents amidst the prevailing tight housing supply situation. The Government has been closely monitoring the residential market development. The overall private residential price index in January 2023 remained at a high level despite its retreat in comparison to that at the beginning of 2022. The mortgage-to-income ratio (i.e. the home purchase affordability ratio) remained at an elevated level of 70 per cent in the fourth quarter of 2022, which was significantly above the long-term average of 49 per cent over the 20-year period from 2002 to 2021, indicating that the overall residential property prices are still at a level beyond the general public's affordability. Taking into account a basket of factors including the pace and magnitude of property price changes, transaction volume of residential properties, future supply, economic conditions and outlook, as well as overall market sentiment, the Government does not see the need to adjust the demand-side management measures for residential properties under the current circumstances. If the demand-side management measures are abolished hastily without suitable conditions, such move could be subject to market speculation and may stimulate demand for, and even short-term speculation of, local residential properties by some persons. As always, the Government will continue to closely monitor the residential property market situation, and take appropriate measures as and when necessary in response to market changes with reference to relevant indicators.