With the launch of the second phase of Quantitative Easing (QE2) by the US, the global financial environment is now in a rather abnormal state. While the efficacy of QE2 in achieving the desired objectives of stimulating the US economy and improving the job market is too early to tell, the negative side effects of such policy on the Emerging Market Economies are likely to continue and intensify. As a result, the risk of asset bubbles in the EMEs is rising. In this connection, Hong Kong is not immune.
2. Following the package of measures introduced by the SAR Government and the HKMA in mid-August, the property market seemed to have slowed down somewhat in September and early October. From mid-October, the property market has picked up again, as reflected in the rising transaction volume and prices. Under the present environment in which interest rates are exceptionally low and there is a huge amount of excessive liquidity flooding the banking system, many investors may easily overlook the fact that the income level of Hong Kong people is increasingly trailing the property prices, and tend to harbour rather unreasonable expectations that interest rates would stay at such low level for a very long time and that housing prices can only go up and not down. Under the circumstances, we are very concerned that the housing market and consequently the mortgage market will become even more exuberant, thereby exposing the banking system to higher risks.
3. In order to protect banking stability, the HKMA has just issued a set of new guidelines to banks requiring them to further strengthen their risk management standards by adopting the following measures:
| (a) |
for residential properties valued at HK$12 mn or above, the maximum Loan to Valuation Ratio (LTV) for mortgage loans will be lowered from 60% to 50%; |
| (b) |
for residential properties valued between HK$8 mn and HK$12 mn, the maximum LTV will be lowered from 70% to 60%, with the maximum loan amount not exceeding HK$6 mn; |
| (c) |
for residential properties valued at HK$8 mn or below, the maximum LTV will be maintained at 70%, with the maximum loan amount not exceeding HK$4.8 mn; and |
| (d) |
for all non-owner-occupied residential properties, all properties held by companies and all industrial/commercial properties, the maximum LTV will be lowered to 50%, regardless of the value of the properties. |
4. The above measures will take effect immediately, although mortgage loan applications with the provisional Sale and Purchase Agreements signed today or earlier will not be affected. My colleagues will explain the details of these new measures in a separate press briefing later today.
5. In the interest of enhancing risk management, the Hong Kong Mortgage Corporation has also decided to modify its Mortgage Insurance Programme. The details of the modifications will be announced by the HKMC later today.
6. Following consultation with the Personal Data Privacy Commission, it has been agreed that the public consultation on the proposal to develop a Positive Mortgage Data Sharing Scheme will be undertaken early next year with a view to making the Scheme ready for implementation before the end of the first quarter next year. Needless to say, the launch of the Scheme will be of considerable help to banks in making more reliable assessment on the credit worthiness of mortgage applicants.
7. I would like to reiterate the point that Hong Kong is now facing an exceptionally unusual macro-financial environment, a situation that cannot continue indefinitely. While I am not in a position to foretell precisely when the adjustment will occur, I am sure that such adjustment will definitely come one day. As the gate-keeper of Hong Kong's banking system, the HKMA must introduce appropriate prudential measures in a timely manner to ensure that our banks adopt the necessary risk management standards and practices and to make our banking system more resilient to shocks, so as to dampen the damage that would be inflicted by the bursting of the asset bubble when there are adjustments to the macro environment.
8. Lastly, I wish to remind everyone that it is not enough to rely solely on the measures introduced by the Government. The entire community must heighten their awareness of the risks that lie ahead and work together to make the necessary preparation to tackle this difficult situation. It is therefore essential that people of Hong Kong do not overstretch themselves by borrowing beyond their means, bearing in mind that interest rates will one day return to more normal, but significantly higher levels. We must learn from the experience of the bursting of the last asset bubble and work together in order to avoid a recurrence of the very difficult situation.
