![]() ![]() Institutions should have written policies on property lending which are approved by the board of directors in the case of locally incorporated institutions and by head office in the case of branches of foreign banks.More specifically, the HKMA expects that all institutions which are involved in property lending should adhere to the following guidelines: While the recommendations in the Report should bring long-term benefits in risk reduction, the HKMA believes that institutions should continue to adopt a cautious approach towards property exposure and, within the special circumstances of Hong Kong, should aim for a balanced loan portfolio. These factors mean that individual property loan which were good in isolation can turn bad because of a change in external market circumstances.īoth these issues have been addressed in the Report of the Informal Group which has considered ways in which the secondary mortgage market in Hong Kong might be improved, thereby reducing the liquidity and concentration risks. The market may also be affected by over-supply produced by the collective lending decisions of individual institutions. Notwithstanding the long term trend in Hong Kong, the property market is cyclical in nature and may be influenced by factors over which individual institutions have no control, such as the general level of interest rates. Second, property lending involves a concentration risk of a special kind. average life of residential mortgages in Hong Kong is much shorter than the contractual maturity, such loans are still a: relatively illiquid asset. First, property lending is generally long-term in nature and the funding of this involves running a maturity mismatch. ![]() Having said this, property lending does involve certain risk which need to be carefully considered by institution. But, as already noted, the loan default and delinquency rates in the mortgage portfolio have been low. The absence of non-bank financial institutions (such as building societies) means that the supply of mortgage finance is channelled largely through the banking system, producing levels of property exposure which are high by international standards. Also, Hong Kong has seen a heavy demand for private residential accommodation and hence mortgage finance in recent years. In particular, the supply of land is relatively limited and this has tended to cause land values to rise in the long-term. This policy is based on an acknowledgement that the Hong Kong property market has certain special characteristics. It is important to stress that the basic thrust of the HKMA's policy on property lending has not changed. Equally, it wishes to restate, in the light of recent comment on the subject, that it continues to support the 70% ceiling in respect of loan to value ratios. In the light of these difficulties of interpretation and measurement, the HKMA wishes to clarify its policy on property lending, with particular reference to the 40% guideline. at end-September 1994, the amount of loan default/delinquency (defined as loan repayments overdue for more than 60 days) was only 0.43% of the outstanding loan amount. Moreover, as members of the Committees have pointed out, the guideline does not distinguish between different types of property lending, Including lending on residential mortgages on which, as the above Survey has shown, the loan loss experience in Hong Kong is very low. ![]() It has however come to be seen as imposing an upper limit of 40% on property exposure, which was not the intention. This guideline was intended to slow down and in some cases reverse growth in property lending as a percentage of domestic loans. 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 The guideline as contained in the letter of 18 February 1994 which, inter alia, stated that: Our discussions with the Committees revealed that the application of what has become know as the 40% guideline is causing, some Complications of interpretation. It has also had regard to the results of the survey on residential Mortgages in Hong Kong carried out for the Informal Group on Secondary Mortgage Market chaired by the HKMA and included in the report of the Informal Group. ![]() The HKMA has recently reviewed its policy on property lending, taking into account practical experience of the operation of its guidelines and the views of both individual market participants and the Banking and Deposit-taking Companies Advisory Committees (the committees). I previously wrote to your Association on 18 February 1994 to set out some guidelines on property lending. This letter provides further guidance on the HKMA's Policy on property lending. ![]()
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