By Wendy Weng
Chinese banks’ mortgage loan growth dropped the most in 2017 and will continue to be affected by property cooling measures and relatively tight liquidity conditions. Hong Kong banks’ mortgage loan growth, on the other hand, increased, but they are not expected to maintain it due to tough operating conditions.
More home buyers are financing their purchase through mortgage loans, and the demand for home ownership remains strong in most markets. Although rapid mortgage loan growth enables banks to generate more revenue, it poses risks for financial stability.
For example, strong mortgage loan growth in markets like Australia, China, and South Korea has raised worries of potential property bubbles, forcing governments to introduce measures to cool down overheated housing markets. The growth rate of mortgages in China’s banking sector declined the most among twelve markets in Asia Pacific in 2017, although it remained stronger than other markets (Figure 1). Meanwhile, bank mortgage loan growth rates in South Korea and Australia slip from 10% in2016 to 5% in 2017 and from 8% in 2016 to 5% in2017, respectively.
Hong Kong banks’ mortgage loan growth improved the most in 2017. However, they will find it hard to sustain it because of the interest rate hikes.
Indonesia also experienced higher bank mortgage lending growth last year, which can be partially attributed to the benchmark policy rate cut in August2017, and a slight improvement is expected this year, as Bank Indonesia plans on taking measures to boostloan growth.
The growth of Chinese banks’ mortgage debt decelerated in 2017 as stricter housing policies were implemented due to the alarming growth in mortgage loans in 2016 and the rocketing real estate prices that fuelled concerns about asset bubbles (Figure 2). Relatively tightened liquidity conditions also helped cool down the housing marketing.
Dozens of local Chinese governments imposed home purchase restrictions to dampen speculation, such as limiting the number of apartments citizens can own and banning home resales two to three years after initial purchase. The minimum down payment required for mortgages also increased.
Chinese banks also have a problem on scarce lending quotas. Some bank branches were not able to provide new mortgage loans in the fourth quarter of 2017 due to the exhaustion of loan quotas. Meanwhile, the time allotted to approve loans increased from weeks to months. Since September 2017, mortgage interest rates have went up in Beijing and other big cities. China’s big four banks charged 105% of the benchmark rate to first home buyers in Beijing, while smaller banks hiked rates more aggressively.
As mortgages rules tightened, some borrowers turned to short-term consumer loans to fund their down payments. They were permitted to take out these loans to use for home purchases, even though this practice has been long banned, leading to probes by regulators.
In 2018, mortgage loan growth is expected to remain moderate, as the Chinese government is not expected to relax the cooling measures it imposed to rein in soaring home prices. Early this year, Chinese banks decided to raise mortgage rates for first-time home buyers to keep mortgage lending under control.
In the face of slower mortgage loan growth, Chinese banks were forced to diversify their asset structure to boost the profitability. Among the big four Chinese banks, Bank of China posted the lowest mortgage loan growth in 2017, also recording the most drop in growth (Figure 3). Meanwhile, China Construction Bank remains the largest mortgage loan lender. Some smaller banks such as Ping An Bank and China Everbright Bank continued recording strong growth rates.
Strong housing demand led to higher mortgage loan growth among Hong Kong banks, from 4% in 2016 to 8% in 2017, despite tightened mortgage measures by the government to manage asset risks and bubble fears (Figure 4).
In May 2017, the Hong Kong Monetary Authority (HKMA) raised the amount of capital banks have to set aside to cover new residential mortgage loans,thus, resulting in some banks raising their mortgage interest rates. HKMA also cut the amount of loans that borrowers with multiple mortgage loans and whose income is mainly derived from outside of Hong Kong can get. However, local residential property prices hit record high last year and the number of property transactions was also higher, mainly owing to tight demand-supply balance in the housing market and alow interest rate environment.
Mortgage rates are either linked to the Hong Kong Inter bank Offered Rate (Hibor), or linked to prime rates, which are set by banks. More than 95% of mortgage loans have been priced based on Hibor, and most Hibor-linked mortgage loans contain a clause,which states that if a borrower’s repayments a regreater than they would be on a prime rate-linked mortgage, they will be automatically switched to a prime-based payment scheme.
The one-month Hibor remained low, but has surged since mid-September 2017, hitting a nine-year high. As Hibor rises, the floating mortgage rate reaches the capped rate linked to the banks’ prime lending rate, and banks may need to raise their prime rate for the first time since 2006.
Although facing an interest rate hike cycle, some Hong Kong banks squeezed their loan margins to offer fix-rate home loans, attempting to lure potential homebuyers at times of rising borrowing costs. The ratio of new mortgage loans priced at fixed rates rose to 27.6% in February 2018, from 5.5% in December 2017, according to HKMA. However, HSBC decided to withdraw the fixed-rate mortgages in Hong Kong a week after the US Federal Reserve raised its key interest rate by 25 basis points in March 2018, as higher interest rates squeezed their profit margin further.
Prior to that, in January 2018, the HKMA announced that the countercyclical capital buffer for Hong Kong will increase to 2.5% from the current 1.875% by 1 January 2019 to curb the rise in property prices and the risks posed by credit expansion. Residential property prices in Hong Kong will continue to rise in 2018, but bank mortgage loan growth is expected to slow down.
There is fierce competition in the mortgage loan business among banks and non-bank lenders in Hong Kong. The mortgage business of non-bank lenders, especially the financing vehicles of developers, has been growing fast, although their market share is still small. The financing vehicles of developers offer home loans to those who are unable to get mortgages from banks.
HSBC, Hang Seng Bank and Bank of China (Hong Kong) mortgage loan growth greatly improved and their combined market share reached about 63% in 2017 (Figure 5). Many Hong Kong Banks focus on leveraging new technologies to enhance their mortgage loan business and increase competitiveness. Bank of China (Hong Kong) pioneered the use of blockchain technology for mortgage property valuation services in Hong Kong. The bank launched a mortgage property valuation system based on blockchain technology in November 2016, which simplified the valuation and loan approval processes and helps enhance operational efficiency, reduce operating cost and improve security and user experience.
No improvement in mortgage loan growth is expected in China and Hong Kong this year. In such a situation, banks must continue exerting efforts to increase revenue from other sources to gain higher profit, and at the same time, they will need to enhance their mortgage loan business.