The Monetary Authority today issued new guidelines to banks on measures to strengthen their risk management as the risk of the property market overheating has risen, the authority’s Chief Executive Norman Chan says.
Speaking to the media today, Mr Chan said banks must assume a mortgage rate increase of 300 basis points, instead of the existing 200 basis points, in stress-testing mortgage applicants’ repayment ability. He added this measure will apply to mortgage loans for all property types.
The maximum loan-to-value ratios of mortgage loans for all commercial and industrial properties will be cut by 10 percentage points from the existing applicable levels.
The maximum loan-to-value ratio of mortgage loans for standalone car park spaces will be set at 40% and the maximum loan tenor at 15 years. Other requirements on maximum loan-to-value ratio and debt-servicing ratio that apply to commercial and industrial property mortgage loans will also apply to standalone car park space mortgage loans.
The measures take immediate effect, Mr Chan said. Loan applications for property transactions with provisional sale and purchase agreements signed on or before today will not be affected.
Unusual circumstances
“Hong Kong is facing an extremely unusual macro-monetary environment. The ongoing quantitative easing by advanced economies is unprecedented in both scale and duration. Interest rates have been artificially maintained at extremely low levels, and we see huge volumes of liquidity flow into emerging markets like Hong Kong. The current unusual circumstances are one of the main drivers for the prolonged boom in the local property sector. The risk of over-heating in the property sector to financial stability in Hong Kong is no smaller than that seen in 1997,” he said.
“Mortgage rates are around 2%. And, even if the low interest rate environment were to remain until 2015 as anticipated by the US Federal Reserve, the US interest rates are bound to head back to more normal levels.”
He urged people to be cautious and not underestimate the risks that rising interest rates could have on their repayment ability, asset prices and Hong Kong’s overall economy.
In a related development, the Hong Kong Mortgage Corporation Limited today announced revisions to be made to the Mortgage Insurance Programme eligibility criteria.
Currently, properties valued at or below $6 million are eligible for the maximum Mortgage Insurance Programme cover of 90% loan-to-value. After the revisions, only mortgage loans of properties valued at or below $4 million will be eligible for the maximum 90% loan-to-value cover.
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