Residential property market to shrink by a fourth

Hong Kong’s banks are in for more pain as the new and unduly strict rules to curb property speculation choke decelerating market growth even further.

The new stimulus announced by the U.S. Federal Reserve September 13 forced Hong Kong to take immediate action to prevent its tumble into recession, and from stoking an already overheated residential property bubble.

The Hong Kong Monetary Authority ordered banks on September 14 to curb home loans to borrowers with more than one mortgage to prevent Hong Kong being flooded with hot money, only hours after Fed Chairman Ben Bernanke announced an open-ended stimulus plan to spur U.S. growth and boost anemic employment.

The HKMA’s fifth round of property market prudential measures are expected to further weaken mortgage loan demand. The measures will also increase the difficulty for some home investors to finance mortgage loans.

As a result of the HKMA’s tightening, the city’s mortgage lending value is expected to fall 25% in 2012 from last year, adding more pressure on banks' profits.

"Local banks may see contraction of the mortgage loan business, and they may launch more marketing efforts to boost more business through offering cash rebates," said Chief Economic Analyst Sharmaine Lau of mReferral, a local mortgage loan service provider.

"However, I think local banks cannot slash mortgage rates too much since we already have an ultra-low interest rate environment."

A mortgage loan banker said the mortgage loan business of local banks is contracting amid the prudential measures taken by the HKMA, but sees little chance local banks will rush to cut mortgage rates to compete for more business.

Another believes newly-drawn home mortgage loan values might plunge 15% to 30% depending on the actual home transaction amount.

According to mReferral, newly-drawn mortgage loans in the first seven months of 2012 amounted to only HK$98 billion, a huge 43% reduction compared to the total amount of HK$228 billion in 2011. Mortgage loan services providers predict newly-drawn mortgage loans will drop 25% for 2012 to reach the lowest level in the last five years as the HKMA's new prudential measures begin to bite.

The HKMA's Half-Yearly Monetary and Financial Stability Report of March 2012 show the weighted average mortgage rate for newly-approved loans increased to around 2.7% at the end of 2011, back to the levels last seen in late 2008.

The net interest margin of banks improved further in the second half to average 1.28% from 1.21% in the first half of 2011, partly reflecting the banks' move to raise their HIBOR-based mortgage interest rates.