Property sector a key risk for the banking system as home prices rise for 13 consecutive months

The prevalence of high-LTV second mortgages increases default risks for homebuyers.

Elevated property prices continue to pose a key source of risk for the broader economy and banking system, warns Moody's. According to the government, residential property prices have risen for 13 consecutive months since March 2016, despite a series of macro-prudential and tax measures.

Here's more from Moody's:

Developers and finance companies, some of which are associated with developers, have become more aggressive in offering mortgage financing with high loan-to-value (LTV) ratios to homebuyers.

Unlike banks, these companies are not regulated by the HKMA and can bypass most bank-targeted macroprudential measures. According to data from Centaline, a local real estate agency, 16% of primary homebuyers used finance companies as of March 2017, up from 9% a year earlier, and finance companies accounted for a 16% market share of first mortgages for primary units in 2017, up from 12% a year ago.

Hong Kong banks can only underwrite mortgages at between 40% - 60% LTV depending on property value, which should limit the extent of potential losses should homebuyers default on their mortgages. Nevertheless, the growing prevalence of high-LTV second mortgages increases default risks for homebuyers, and will likely exacerbate any future property downturn.