Australia’s efforts to control property risk are being matched by Hong Kong’s regulator, which has moved to curb mortgage lending as property prices surge. The latest round of prudential measures for Hong Kong’s home loan market raised the risk-weight floor on new mortgages from 15 per cent to 25 per cent.
In response to the tough new rules aimed at cooling the white-hot property market, Hong Kong’s biggest banks - including HSBC and Standard Chartered - have started along this path, lifting rates on new mortgages by 10 basis points to 1.4 percentage points above the city’s interbank offered rate, or Hibor.
As a result, UBS Hong Kong analyst Adam Lee expects mortgage returns to decline from current levels of 38 per cent, to an estimated 25.5 per cent – one of the lowest levels of return on record.
This is in stark contrast to 2011 when the Return-on-Tangible-Equity for Hong Kong banks writing new mortgages peaked at 175 per cent – a record for global banks.
“Banks now have an implicit 'quid-pro-quo' from the regulator to lift mortgage rates, and they will continue to use it, as we have seen in other developed markets such as Australia where mortgage capital requirements have increased,” he noted.
“The recent decision to raise front-book mortgage rates by 10 basis points is a positive one, but we believe significant further repricing is required to offset the reduction in mortgage returns.
“However, for banks to restore mortgage returns to 38 per cent from the 25.5 per cent pro-forma level, our analysis shows 'spreads' would need to expand an unprecedented 80 basis points from 1.70 per cent."
For his part, Lee is looking for something closer to 20 to 25 basis points on top of the 10-basis point increase in front-book mortgage rates.
So, in his view, as much as they try, Hong Kong banks will fail to deliver the interest rate leverage the market expects through hiking home loan rates. That said, Hong Kong banks should see substantial leverage to higher rates via a rapid expansion in the returns they earn on their 'free funds', which are made up of capital and demand deposits.
However, his analysis suggests spread expansion will be minimal at the early part of this rate cycle.
While Australian and Hong Kong regulators are battling the same risk, they are taking very different approaches. Whereas APRA has introduced measures to curb investor and interest-only lending, Hong Kong’s banking regulator is hitting on borrowers with numerous mortgages or those whose income is mainly derived from outside of Hong Kong.
“The market appears to have shrugged off or ignored the HKMA's additional macro-prudential moves. After this, the eighth round of macro-prudential tightening of the HK market, there appears to be a level of comfort that these policy measures will not meaningfully affect banks,” argued Lee.
“However, with mortgage returns now at record lows, pressuring bank returns, we would expect this to shift as banks potentially lift front-book rates further in response."
Mortgages represent 21 per cent of loans for Hong Kong banks, but only 12 per cent of total regulatory exposures.