I am writing to recommend that it would be appropriate for institutions to tighten the criteria for property lending, to the extent that they have not already done so.
This is against the background of quite a sharp rise in property lending in 1996. On the basis of the last available figures, property lending* rose by almost 16% in the first three quarters of 1996 (over 20% at an annual rate). This partly reflected a rebound in lending for property development and for property investment which had shown little growth in 1995. With other types of lending relatively subdued, property lending as a percentage of other loans for use in Hong Kong rose from 39% at end-September 1995 to 40.7% at end-September 1996. Subsequent figures from our monthly survey of residential mortgage lending show that the growth of such lending accelerated in the final quarter of 1996. The December 1996 figures, which have been released today, show that the total amount of outstanding mortgage lending by the 33 institutions in the survey rose by 2.4%. The growth rate reached 18.9% for the year as a whole.
This growth in lending has been accompanied in recent months by a sharp rise in residential property prices, particularly at the upper end of the market, and renewed signs of speculative activity. At the same time, competition among the banks has forced down the margin on residential mortgages to levels which are barely above best lending rate. Thus, the return has fallen while the risks have increased.
Although residential mortgage lending can justifiably be regarded as a relatively safe form of lending, the risk will tend to increase as properties become more expensive. Banks will have more at stake to a single borrower on such properties, and prices can be more volatile and valuations more uncertain. We are aware that some banks have already tightened their criteria on more expensive properties. It would be prudent for this to be adopted generally. We therefore recommend that a maximum loan to value1 of 60% should be adopted for "luxury" property with a value of more than HK$12 million.
To avoid the anomaly whereby the maximum amount which a lending institution could lend against a property would fall if the property were to come just within the "luxury" bracket (e.g. 60% of just above HK$12 million is less than 70% of just below HK$12 million), the 60% above should be interpreted as "the higher of 60% of value or HK$8.4 million". (This means for example that the amount which could be lent on a property valued at HK$13 million would be HK$8.4 million or 64.6%.)
Authorized institutions should also, of course, always ensure that adequate consideration is given to the borrower's repayment capability, and that debt service ratios remain prudent. This will help to guard against borrowers overextending themselves, which increases the risk of default.
These recommendations are not retrospective. They apply to new commitments entered into by authorized institutions from now until further notice. The recommendations apply to current market conditions and are subject to change. While the recommendations apply specifically to loans for the purchase of residential properties, institutions are expected to apply prudent criteria in respect of all types of property lending.
* For this purpose, "property lending" comprises lending for property development and investment and residential mortgage lending (other than HOS/PSPS loans).
"Value" in this context means the lower of purchase price or the lending institution's own valuation.