Last month, the Hong Kong Monetary Authority decided to decrease the required loan-to-valuation ratios for luxury property (more than HK$20 million) from 70 percent to 60 percent and tighten mortgage insurance criteria. The changes are cloaked in bank prudential language. However, they are a populist response to public pressure that threatens the fundamentals of the linked exchange rate system.
Tuesday, November 24, 2009
Last month, the Hong Kong Monetary Authority decided to decrease the required loan-to-valuation ratios for luxury property (more than HK$20 million) from 70 percent to 60 percent and tighten mortgage insurance criteria.
Property prices have risen quickly in Hong Kong, with the Midland index up 23.8 percent since its November 2008 trough. Recently, more intense media focus followed the Chief Executive Donald Tsang Yam-kuen's policy address and (arguably belated) measures looking to increase property supply. Calls for more vigorous government action on housing affordability have been widening.
In this context the HKMA changes look more like a response to public pressure. The case that there are prudential concerns is weak. There is no evidence that recent changes in luxury prices are fueled by bank credit supply. Mortgage credit growth remains subdued (with loan outstandings up 3.7 percent year- on-year). Mortgage delinquencies are at historic lows of 0.05 percent of loans.
Banks themselves adjust valuations and rules in a buoyant market and are cautious about investor purchases and high-end property. Hong Kong banks have a very good track record in mortgage credit.
These token measures are unlikely to have more than a signaling effect on the property market, but the damage to policy is deeper. The linked exchange rate system is a rules-based system administered by the HKMA.
As a consequence, Hong Kong does not have discretion in monetary policy. With a fixed exchange rate, there is a reliance on flexible factor prices and asset prices to adjust where currency cannot.
The government's response to the financial crisis was strong. It did not ban short-selling. It used existing rules and policies rather than innovation, leading to confidence in the response that stabilized the market.
Measures in the property market are inconsistent with that approach and a surprise to market participants. With the new changes, the HKMA is using its discretion on prudential rules to counter the consequences of its monetary rule for property prices.
It has already warned in research papers about the risks of monetary policy globally that is too loose for too long. Is the HKMA pining for more power over money supply? Further, the government is seeking to reduce wage flexibility through a minimum wage that may in stress be inconsistent with the fixed exchange rate. The HKMA's new tinkering approach undermines bank prudence. Like the many administrative rules for banks on the mainland, it transfers an element of responsibility for credit rules to the regulator.
Banks burdened by oppressive rules are likely to overreact when those rules inevitably are loosened. They will tend to believe any loan permitted by regulatory rules should be underwritten.
It is tempting to see a pre-emptive response to rising property prices as leaning against the risk of a US-style property crisis. Ironically what the Hong Kong government is doing is repeating policies that were a cause of the US crisis.
By responding to demands for "affordable housing" it is bending commercial practice and meddling in credit markets. The HKMA is itself a participant in the mortgage business through the Hong Kong Mortgage Corporation. It is the largest shareholder in the local stock exchange. It is a major investor in companies and securities locally. It is now responding to popular demands for action on property prices. It has started to use its prudential rules actively to achieve government policy goals outside the financial system. It is battling to keep its role as a regulator of investment product sales for banks.
All of this activism is inconsistent with the narrow functions of administering a currency board, a role which looks too constraining for the ambitious technocrats of the HKMA. It is time for a review of the HKMA, to establish a sunset clause on its expanded role and return it to its core function.
Bill Stacey is chairman of the Lion Rock Institute, a free-market think-tank