Norman T L Chan: Recent economic and financial developments in Hong Kong Remarks by Mr Norman T L Chan, Chief Executive of the Hong Kong Monetary Authority, Hong Kong, 22 February 2013. *  *  *  The property market in Hong Kong moderated briefly after the introduction of the fifth round of prudential measures on property mortgages by the HKMA in September 2012 and the new tax measures by the Government in October 2012. However, activities in the property market picked up again recently, with significant increases in transaction volume and prices of residential properties as well as commercial and industrial properties. The risk of overheating in the property market has, once again, risen sharply. Moreover, the recent increase in intensity of the quantitative easing by central banks in Europe, the US and Japan has made it more difficult and uncertain for them to “exit” these measures in the future. It will be particularly so when inflationary pressures emerge again in the advanced economies, and the pace and extent of interest rate hike could be greater than originally expected. In fact, in the last quarter of 2012, the HKMA already started requesting local banks to assume a of 300 bps increase in interest rate above the baseline scenario for its mortgage portfolio when conducting stress testing.
In order to further enhance banks’ risk management in property mortgage lending and to strengthen borrowers’ resilience to withstand future interest rate hikes, the HKMA has just issued a set of guidelines to banks, requiring them to adopt an increase of 300 bps instead of 200 bps of interest rate when stress-testing the repayment ability of mortgage applicants. This measure is applicable to all types of mortgages, including residential as well as commercial and industrial property mortgages. The risk of overheating in the commercial and industrial property market also continues to rise. Our experience shows that the quality of commercial and industrial property mortgages will deteriorate more significantly than that of residential property mortgages during market downturns. In view of these circumstances, our guidelines have also required banks to lower the maximum LTV ratio of mortgage loans for commercial and industrial properties, whether or not for self-use, by 10 percentage points from the existing applicable levels. For example, for mortgage applicants with income mainly derived from Hong Kong, the maximum LTV ratio will be lowered from 50% to 40%. If the applicant’s income is mainly derived from outside Hong Kong, the maximum LTV ratio will be lowered from the current 40% to 30%. The HKMA has also required banks to standardise the maximum LTV ratio of mortgage loans for all standalone carpark spaces at 40% and the maximum loan tenor at 15 years.