Hong Kong Property:HKMA announces further tightening measures on residential mortgages
Expect buying demand to skew even more towards the primary market ahead
In addition to the curbs on financing to developers announced on May 12, the HKMA announced the 8th round of mortgage tightening since Oct-09 with the aim of safeguarding the banking system from escalating residential mortgage risks on surging property prices. Given there is no corresponding tightening on developers’ offering of high LTV mortgages, we believe the impact on the property market will be relatively mild. Thus, we expect buying demand to skew even more towards the primary market. Indeed, the primary market’s share has continued to rise since the first mortgage tightening. In Apr-17, primary sales made up 39% of total volume, markedly up from 15% in Oct-09.
New measure will impact local investors who have been acting as guarantors
After market close on May 19, the HKMA announced three curbs on residential mortgages with immediate effect: 1) raising banks’ risk-weight floor from 15% to 25% for new residential mortgages approved after May 19; 2) lowering the loan-to-value (LTV) ratio by 10ppts for borrowers and/or guarantors with one or more pre-existing mortgages. In our view, this will impact local investors who have been buying properties in their children’s names so as to take advantage of the lower stamp duty applicable for first-time buyers, but acting as the guarantor for the respective mortgage loan; and 3) lowering the applicable debt-servicing-ratio (DSR) by 10ppt for mortgage loans extended to borrowers whose income source is mainly from outside HK.
Further limiting leverage in the banking system
Similar to previous prudential measures, the most direct impact in the near term will be weaker mortgage loan growth (as shown in Figure 4) and higher loan pricing, before mortgage competition potentially kicks back in again. Regardless of other side effects resulting from these prudential measures, such as further pushing purchasing power and risks towards primary projects, we believe these rules were successful in limiting over-leveraging in the mortgage segment, with average system LTV of 51% (Figure 5) for new loans in FY17 (2005-10 average: 62%), and near zero delinquencies with no cases of negative equity now. As these measures are targeted towards new mortgage growth, the impact should be manageable. We estimate the capital impact to be limited, at a low-to-high single-digit bp impact on banks under coverage.
Mainland developers’ aggressive bidding has driven up market sentiment YTD
Overall sentiment in the Hong Kong residential market has been stronger than expected YTD, driven by aggressive bidding for residential land plots in Government Land Tenders by Mainland developers, where the successful bid prices often far exceed the ASPs of nearby projects. On the other hand, investment demand from local investors meaningful came back as developers offer cash rebates/incentives that largely offset the stamp duty burden. By reference to the Centa-City Leading Index (CCL), residential prices were up by 8.1% YTD.
Valuation and risks (see p. 5)
For development properties, we apply DCF; for investment properties, we use an income capitalization approach; for non-property business, we use a varied approach, including income multiples, as well as NAV, for business segments; for HK banks, we use Gordon Growth Method and SOTP. Downside risks include stricter than expected policy measures and unexpected economic fluctuations in the Chinese economy Upside risks: Policy loosening, leading to strong market recovery, significant improvement in the credit environment.
