The number of mortgages in negative equity is declining as property prices rebound.
A friend told me this morning, with great excitement, that over the weekend he had received a bid for his flat that exceeded the outstanding amount of his mortgage loan. He was no longer in negative equity with this flat that he had bought a few years ago. I asked him whether he was going to sell it. He said no and volunteered the information that he was considering buying another one as an investment property, given that the rental return is higher than the interest on money on deposit with banks and higher than the mortgage interest rate. He sought my advice on whether he should do so. I gave him the usual bureaucratic but appropriate line that I do not give investment advice, other than on the investment management of the Exchange Fund and of other funds belonging to public organisations in which I had an involvement as a board or committee member.
But I was sincerely glad for him, and for many other members of the community servicing mortgages, particularly those in negative equity. The past few years have not been easy for them, seeing the prices of their homes fall, from their peak in 1997/98, by almost 70%. And for many who also lost their jobs, the hardship has been unbearable. To be sure, mortgage interest rates have come down sharply, along with successive cuts in US dollar interest rates, and also significantly because of much greater competition among banks. But still, buying a home is, for most people, a decision of a lifetime. The feeling of throwing money, month after month, into a black hole, as a result of getting the timing wrong in such an important decision, can be very unpleasant, to put it mildly.
Thankfully, the economic recovery, the prospects of a better balance between the supply and demand of residential property, continuing low mortgage interest rates, a pick-up in stock market activity and stock prices, and a host of other favourable factors have turned sentiment around. As residential property prices rebounded, the number of mortgages in negative equity started falling in the third quarter of last year, from the peak reached in June of an estimated 106,000 cases to around 67,600 at the end of the year. There seems to have been further and more significant increases in residential property prices in January this year, notwithstanding the usual lull in the market at around Lunar New Year. There is hope therefore that the reduction in the number of mortgages in negative equity is being sustained.
I am, of course, talking about bank mortgages only. There are still many property-owners with second mortgages from developers and other financing sources outside of the banking system. But they also benefit from this welcome change in market conditions. As banking supervisor I am glad to see an improvement in the asset quality of banks, in that the deficiency in the value of the security of their mortgage loans has been reducing. This deficiency has been on top of our concerns about the banking system, for there is no example of any banking system in other parts of the world unscathed by a fall in residential property prices of almost 70% over a short period of about five years. The cushion afforded by the prudent mortgage lending policy of 70% loan-to-value ratio has thus been very helpful.
But I did give my friend a word of caution. Making use of simple economics, I said that, in a situation when the long-run supply of a commodity was limited, the long-run demand was clearly growing and the commodity was a necessity, it was not advisable to be "short" in that commodity. One should at least be "square". If one wished to go "long" in a market, one should first have a good appreciation of the volatility of the market, in terms of both the underlying price and the yield, learning from history, and one's financial staying power. And at a time when prices are rising quickly one should think long and hard about these questions. I added that, in the residential property market, a short position could be defined as not having your own home, a square position as having just your home and a long position as having investment property on top of your home. The response of my friend, who is not an economist, was that, in the long run, we are all dead. I quickly shut up and vowed to stick to the bureaucratic response, even among friends.
Joseph Yam
12 February 2004
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