Property market and mortgage lending
Mr CHAN Kin-por pointed out that as the United States (“US”) Federal Reserve had extended its pledge to maintain the exceptionally low interest rate at least until mid 2015 under its third round of quantitative easing (“QE3”), he was concerned that the low-interest environment would linger on for an extended period of time. While it appeared that an increase in interest rate could help bring down local property prices to a reasonable and affordable level, Hong Kong did not have the flexibility of using interest rate policy to cool down the property market given the Linked Exchange Rate (“LER”) system of pegging Hong Kong dollar to US dollar. Mr CHAN sought HKMA’s views on whether a downward adjustment of property prices could be realized in the near future. He also enquired about HKMA’s assessment of the risks arising from a fall in property prices by 10% to 20% that might lead to negative equity in residential mortgage loans.
Chief Executive of Hong Kong Monetary Authority said that property prices were susceptible to economic cycles. It would be unrealistic to believe that property prices would rise indefinitely. While a reversal in the low-interest rate environment would certainly impact on the property market, it was difficult to predict future interest rate movements. It was also uncertain how and when the central banks would implement exit strategies from quantitative easing. The current extremely low interest rate environment would not last indefinitely. Mortgage borrowers should be careful not to overstretch themselves and borrow excessively bearing in mind that a mortgage loan normally lasted for many years. As regards the risks of negative equity assets, CE/HKMA said that the lower the loan-to-value (“LTV”) ratio was, the less likely the borrower would be at risk of negative equity should property prices go down. With the introduction of five rounds of countercyclical macroprudential measures, the average LTV was now lower, providing more buffer against the impact of a fall in property prices.
RMB business and cross-boundary capital flow
Mr CHAN Kin-por observed that the deposits in RMB customer deposits and certificates of deposits amounted to some RMB 600 billion in the third quarter of 2012 which had shown little growth on a year-on-year basis. He remarked that the steady size of the total RMB deposits and capital was not conducive to developing Hong Kong as an offshore RMB business centre. He opined that the Government should consider establishing a mechanism for flow-back of RMB and holding RMB offshore to ensure that RMB capital in Hong Kong would yield a reasonable return.
Economic outlook for Hong Kong
Mr CHAN Kin-por observed that political contentions between the Republican Party and the Democratic Party of the US persisted as to how to reduce the deficit of the US government and prevent the occurrence of a fiscal cliff. In view of a mounting risk of recession in the US and a downgrading of its credit rating, Mr CHAN enquired about HKMA’s assessment of an impending fiscal cliff in the US and measures to address a possible global financial crisis if the US were caught in a fiscal cliff. CE/HKMA said that the general view of US economists and analysts was that the chance of US being knocked into a total fiscal cliff was slim. Now that the presidential election was over, he believed that the US policymakers were ready to knuckle down to find a solution. It would be a matter of how far the US fiscal measures would go in cutting public expenditures and raising taxes that would determine the magnitude of shock on the US and global economy. Uncertainties still clouded over the economies of both the US and the eurozone. The HKMA would continue to monitor developments in this regard. It would be crucial to maintain high capital adequacy, sufficient liquidity and robust risk management standards of the banking sector of Hong Kong to prepare for any economic turbulence ahead.