Mentioning Fannie Mae and Freddie Mac to anyone will probably revive the nightmare of the disastrous subprime mortgage crisis. In a city where the majority of homebuyers seek a mortgage, do you ever wonder: does Hong Kong have a Fannie Mae or Freddie Mac in the making
Created just before the city’s handover in 1997, the Hong Kong Mortgage Corporation provides government insurance up to 90 percent of a property’s price — also known as secondary mortgages. At the time it was a desperate attempt to revive the city’s slumping property prices.
Thanks to this, homebuyers have to put up a down payment of just 10 percent of their flat’s value. Without insurance, the 30 percent required by the government (or a 70 percent loan-to-value ratio) would disqualify many first-timers in a city, where buying a shoebox flat cost a lifetime’s saving.
But here comes the rebuttal: is a 90 percent ratio far too great a risk against the backdrop of renewed housing price bubble fears? Like it or not, the red-hot market is back. “On my radar screen another risk has emerged. That’s the risk we encountered back in 2009,”
says Norman Chan, head of Hong Kong Monetary Authority, the city’s de facto central bank. And writing on his official blog, “I remain highly concerned about the risk of a price bubble,” warns the SAR’s outgoing financial chief John Tsang. “Don’t believe property prices will only go up and never fall,” says Tsang, who hints the government is ready to intervene if the market shows any signs of overheating.
We’ve been on a housing market rollercoaster over the past year. Home prices edged up 4 percent this year, after falling 5 percent in last year’s second half, according to Centa-City Leading Index, a measure of home prices from realtor Centaline. Nonetheless, scores of international property analysts as well as local mass-market agencies predict prices will fall again later this year.
The February budget was an immediate sign of relief for investors, who cheered the government not toughening its austerity measures. The latest official figures show new mortgage drawdowns in March rose 25 percent from January, to HK$7.6 billion. The number of new applications plummeted 80 percent from a month ago to just over 10,000.
So who’s to blame? Experts argue the HKMC plays a part in pushing up home prices, at least by stirring up market sentiment indirectly. “The 90 percent ratio lifts up people’s aspirations and encourages them to be aggressive in home purchases,” theorises Nicholas Brooke, chairman of Hong Kong-based Professional Property Service. Alternatively, a 70 percent loan-to-value ratio would give a better balance, prompting people to think twice before buying, Brooke adds.
Some of the same people that warned of the global financial crisis four years ago are among the same ones ringing alarm bells again. But their major concerns are not out of left field: with Hong Kong’s robust lending background, isn’t the city’s mortgage corporation very much at risk in times of a property bubble burst? Will it ever fail like the US mortgage giants did?
Experts say chances are low. The corporation has high credit ratings, the same as the Hong Kong government: Standard & Poor’s AAA and Moody’s Aa1. And the corporation is entirely owned by the city’s government through the Exchange Fund with the city’s financial secretary as the controller.
What’s more, the HKMC has a much “healthier” business structure than its American counterparts. Once at the core of the global crisis, a fatal weakness of Fannie Mae and Freddie Mac was their status as listed mortgage lenders with the primary aim to maximise profits. In other words, they are by nature in competition with banks and hence more likely to overextend themselves by lending, Brooke explains.
However, the HKMC, being as a public-sector organisation, neither originates mortgages nor has the commercial pressures the US behemoths did. It buys mortgages under prudent eligibility criteria from banks, which want to secure liquidity and reduce credit risk arising from their mortgage portfolio.
“In short, the corporation targets financial stability over profitability. Promoting home ownership is just a secondary aim,” says Yu Kam-hung, global property consultancy CBRE’s head of China valuation and advisory department.
Fear that housing may become unaffordable for the public also prompted the corporation to tighten mortgage requirements last June by lowering the cap on the value of property that can be covered by its insurance to HK$6 million from HK$6.8 million, the second cut since late 2010.
Looking ahead, property analysts are cautious towards a shift in the corporation’s lending policies despite the potential re-emergence of an asset bubble, and prefer to “leave things as they are now,” argues Brooke.
The political reality is that Chief Executive Donald Tsang and his political asides are stepping down in about three months’ time. What else can you ask for? What’s more, as Yu puts it, “You might not even feel its existence with local banks all flooded with cash right now, but the corporation is just going to be a powerful buffer reservoir in times of tightening liquidity.”