Guideline No. 5.9
Property lending
I am writing to set out the HKMAs current view on property lending by the banking sector.
For this purpose "property lending" is defined to be the total of the following loans reported in the quarterly return of loans and advances for use in Hong Kong:
- lending for property development and investment under Part C.1
- other residential mortgage lending under Part H.5.b.
During the year to end December 1993 property lending rose by 19.4% and accounted for 37.6% of total loans for use in Hong Kong at the end of the period. Within the total, residential mortgage loans rose by 15.1%, roughly in line with the growth in nominal GDP. Without the 70% mortgage ceiling and other voluntary restrictions adopted by institutions, it is likely that the rise in lending would have been much greater. It is less encouraging to note that lending for property development, investment etc. rose by 25.8% (revised) during the year to end December 1993.
While the property market in Hong Kong remains underpinned by strong demand, it is nonetheless the fact that property lending is relatively high as a percentage of loans and, for locally incorporated institutions, of capital. Moreover, the share of these loans has increased significantly since 1989 (see attached chart). In other countries this has tended to be a warning signal.
The main focus of attention over the last two years has been on the residential mortgage market and institutions are to be congratulated for the restraint they have shown. However, this has not been sufficient to prevent the rise in the share of property lending. During 1993, as noted above, this reflected the rapid growth in lending for property development and investment whose share of total loans for use in Hong Kong rose from 15.0% to 15.9%. In view of this, it seems right, at an early stage in the new year, that institutions should review their exposure to the property market and ensure that it is being contained within prudent limits.
It is not the intention of the HKMA to set an arbitrary limit for the percentage of individual institutions' portfolios that should be accounted for by property lending or to set limits on the rate at which such lending should grow. However, there are a number of basic principles to which the HKMA believes all institutions should have regard:
- all institutions should place a cap on their property exposure, both in aggregate and for the different types of exposure (i.e. residential mortgage loans and lending for various types of property development and investment)
- those institutions whose property lending (as defined above) accounts for a larger than average share of their loans for use in Hong Kong, say 40% or more, should consider how that percentage can be stabilized and, if necessary, reduced
- for the banking sector as a whole, an appropriate guideline may be for property lending, both in aggregate and by type, to grow by no more than, say, 15% per annum, in line with the current growth of nominal GDP
- for institutions with a larger than average share of property lending, a slower rate of growth may be appropriate
- institutions should have clearly defined lending criteria in respect of all types of property exposure, not simply residential mortgages - it appears to be market practice that institutions do not normally finance more than 50% of the site cost in respect of individual developments (plus 100% of construction costs) or more than 60% of the acquisition cost of completed investment properties
- institutions should take care that they are not financing residential mortgage loans provided by property developers
- institutions should monitor closely their exposure to individual property developers and to the groups to which they may belong
It is recognized that these principles cannot be applied to individual institutions in a mechanical way and that account must be taken of individual circumstances (including, for example, the loan to deposit ratio and overall balance sheet size of the institution in question). The HKMA proposes therefore to write to those institutions whose property lending is larger than average and/or whose property lending rose relatively rapidly in 1993. Such institutions will be requested to review their existing policy and limits in relation to property lending, if they have not already done so recently, and to consider whether the policy and limits are still appropriate. The HKMA will wish to review the policies and limits of individual institutions against those of their peers and may wish to hold further discussions with those institutions whose appetite for property exposure seems relatively high.
I would be grateful if you would circulate this letter to the members of your Association.
I have written in the same terms to the Chairman of the Deposit-taking Companies Association.
