Mortgage delinquency ratios

inSight

04 Oct 2001

Mortgage delinquency ratios

Despite increasing concern about the economic outlook, there has been a steady decline in the loan delinquency ratio for residential mortgages over the summer. Why should this be so?

For each of the four consecutive months of May to August this year, the loan delinquency ratio for residential mortgages has fallen. From the peak of 1.43% recorded at the end of April this year, it has fallen significantly to 1.28% by the end of August. This is still very much higher than the figure of only around 0.3% in the middle of 1998, before the full blast of the Asian financial crisis hit Hong Kong, but the early sign of stabilisation and perhaps improvement is encouraging. The falling trend in the number, though for still a rather short period, in fact came as something of a surprise to us in the HKMA. During the four-month period there was increasing concern about global economic slowdown bringing deteriorating economic prospects for Hong Kong, at least for the short term. The revised forecasts of GDP growth, from both the private and public sectors, were all sharply down from their original levels. There was also significant wealth destruction brought about by downward adjustments in the prices of financial assets, although residential property prices have remained relatively stable over the period.

We have, of course, still to wait and see whether this trend will continue into September and beyond, given the terrorist attacks in the US, which have further sent asset prices sharply lower worldwide, exacerbating the severity of the wealth destruction already in progress. The September figures from our monthly residential mortgage survey will not be available until later this month. It will be useful, nevertheless, to try and understand why there has been this improvement in the mortgage delinquency ratio.

We have discussed the matter with quite a number of bankers. They too were a little puzzled. But two explanations emerged from our discussions. The first explanation is a somewhat fortuitous one that suggests the need for greater caution in the interpretation of the figures. This is related to the possible, larger mortgage loan write-offs during these months. Although there is a lack of specific data on these write-offs, the recent surge in personal bankruptcies does lend credibility to this explanation. Furthermore, there is a limit on the length of overdue payments in any mortgage beyond which a bank has to take the prudent action to repossess the property. The increasing trend of the mortgage delinquency ratio, which persisted for about three years from the middle of 1998 to April 2001, supports the likelihood that banks have been taking this unwelcome but inevitable action. The mortgage delinquency ratio is defined as the ratio of mortgage loans overdue for more than three months to total outstanding mortgage loans. When the numerator and the denominator of the ratio both decrease by the same absolute amount, the arithmetic, of course, works to reduce the ratio.

But there is a brighter and more plausible explanation. This relates to the successive reductions in Hong Kong dollar interest rates since the beginning of this year, made possible by the underlying trend of falling US dollar interest rates. The Best Lending Rate in Hong Kong has fallen from 9% at the beginning of the year to 5.5% at present. The fall in mortgage interest rates has been even greater, driven by increasing competition among banks in Hong Kong. The market norm for new mortgages now is about 2.5% below the Best Lending Rate. At 3%, it is now about half of what it was at the beginning of the year. We believe that this has increased significantly the ability of those members of the community who have to pay mortgages to honour their commitments on time, to the extent of allowing us to see a genuine improvement in the mortgage delinquency ratio.

We very much hope that the improvement will continue, even though a mortgage delinquency ratio of 1.28% (August) is very low by international standards. However, we fear that the global economic repercussions of the tragic events of 11 September in the US, which will be manifested among other things in higher unemployment in Hong Kong, may undermine the continuation of this nascent and favourable trend. Let us hope that we can look to still lower interest rates on the horizon to provide a further impetus.

 

Joseph Yam

4 October 2001

 

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