HKMA sets restrictive guidelines to avert property bubble escalation

The Monetary Authority has issued tougher guidelines that order banks to tighten underwriting criteria for loans and to set a maximum loan tenor for all new mortgage loans.

Banks are required to adopt the following measures for applicants of mortgage loans for residential, industrial, or commercial properties who have already borrowed or guaranteed outstanding property mortgage loans for one or more properties at the time of the loan application:

First, for mortgage loans assessed based on the debt servicing ability of a mortgage applicant, the maximum debt servicing ratio will be lowered from the current 50% to 40%. The maximum stressed debt servicing ratio will also be lowered from the current 60% to 50%.

An applicant with just one property with outstanding mortgage loans, however, will not be affected by this new measure if the new mortgage loan is for self-occupancy, or for the replacement of an existing mortgaged property.

Second, for mortgage loans assessed on the net worth of a mortgage applicant, the maximum loan-to-value ratio will be lowered from the current 40% to 30%.

Third, for mortgage applicants whose principal income is derived from outside Hong Kong, the applicable maximum loan-to-value ratio will be lowered by 20 percentage points, instead of the current 10 percentage points.

In addition, the maximum loan tenor of all new property mortgage loans is limited to 30 years regardless of whether the applicants have outstanding property mortgage loans for one or more properties at the time of loan application.

The measures take immediate effect. Loan applications in respect of property transactions with provisional sale and purchase agreements signed on or before today will not be affected.

Monetary Authority Chief Executive Norman Chan said that since the introduction of the fourth round of tightening measures for property mortgage loans by the authority in June 2011, the local property market quieted down somewhat – but for just about seven months.

He noted that the property market began to heat up again in February 2012, with significant increase both in transaction volume and prices.

He said that because of the third round of quantitative easing announced by the US Federal Reserve on September 13 ". . . we expect 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.

"Against this background, the risk brought by the continued heating up of the Hong Kong property market on the banking sector will rise again.

"Based on the experience in Hong Kong, borrowers with multiple outstanding mortgage loans have a higher level of indebtedness and leverage. During property market and economic downturns, the bad debt ratio for this group of borrowers can be significantly higher than those with only one property under mortgage.

"In view of this, the authority considers it necessary to require banks to further tighten the underwriting criteria for mortgage loans to borrowers with multiple property mortgages to reduce their credit risk.

"The authority notices a recent trend of lengthening in the average tenor of new mortgage loans. This 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 their loan tenor. Therefore, the authority has now required banks to set maximum loan tenor for all new mortgage loans."

Chan said the authority 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.