No mortgage crisis here

A huge amount has been written about the sub-prime mortgage crisis in the United States. A lot has been written about how falling house prices in the United States which have contributed to the sub-prime crisis. I use the term "contributed" very deliberately. In my view a number of other factors have also contributed to the problem:

(i) the lax (in some cases on-existent) lending standards by lenders;

(ii) inadequate regulation of mortgage lenders, real estate agents and valuers;

(iii) lax regulatory oversight;

(iv) poor investment evaluation and risk assessment by rating agencies, (for the most part) institutional investors which enabled so many high risk loans to be off loaded by mortgage lenders;

(v) a glut of new housing starts.

The question is whether the problems which sectors of the US housing market and the sub-prime problems could be repeated in Hong Kong. The sharp downward movements in many stock markets and some currencies (especially the AUD and NZD) as investors sell show that there is a loss of confidence. At this stage there is nothing to suggest that the Hong Kong mortgage market will experience problems of the kind being experienced in the United States. There are a number of reasons for this:

(a) mortgage loans in Hong Kong are tightly regulated. Loan to value ratios on draw down are limited to 70%. While second mortgages are available, they tend to be the exception rather than the norm. All loans need to be supported by evidence of identity and income. There are some holes in the process which could be exploited, but there is no wide spread practice of "no financials" or "no documents" loans;

(b) affordability levels are still good by historical standards (certainly much better than during the 1990s bull market). Nominal and real interest rates are low. There is no sign of market forces driving interest rates higher;

(c) Hong Kong is awash with liquidity. The ratio of bank deposits to loans has been climbing steadily since the late 1990s. In spite of the appreciation of local and China stocks, there is no sign of a slow down in deposit growth. All this money sitting in banks earning very low interest rates is a loss making proposition for investors;

(d) even in the worst of the Asian crisis when Hong Kong property prices had fallen 50-60%, the default rate on mortgages never got much above 1.5% (and the loss rate would have been a lot less);

(e) we do not have a glut of new housing. If anything there is a shortage at the upper end of the market;

(f) even if things do go wrong, the PRC has shown a willingness to support Hong Kong. They are also suffering from excess liquidity and are trying hard to reduce that excess liquidity. All they have to do is allow more PRC investors to invest in Hong Kong and some of that liquidity will end up here.

I find it hard to make a credible case for a mortgage lending crisis to hit Hong Kong. There may be volatility in share and property prices or even an out right crash, but such problems (or opportunities if you prefer) are likely to be the result of a loss of confidence rather than a change in economic fundamentals.

Credit crunch not affecting mortgage interest rates

For some time the fixings on my floating rate mortgages (at least the HK$ ones) have been hovering either just above or just below 5% pa.

With the so called credit crunch making headlines around the world, one would normally expect interest rates to rise, especially in the short duration end of the yield curve (which is what is used to determine the interest rates on my mortgages). So far this hasn't happened. In fact my most recent fixing showed a slight decline in the interest rate I am paying.

In searching for an explanation, I came up with the following possibilities:

1. the HKMA has successfully supported the market, keeping interest rate rises in check;

2. demand for money has slowed;

3. the credit crunch is confined to sectors of the market which do not (or at least do not yet) affect Hong Kong interest rates.

I have no idea which (if any) is the correct explanation. If I had to guess I would say #1 and #3 are the more likely explanations. This leaves open the possibility that if the credit crunch continues to expand that I may face higher interest rates at some point in the future. Against this it can be argued that any sign of a meaningful slowdown in economic activity is likely to see interest rate cuts. Accordingly, I have concluded that even if interest rates do increase, it is unlikely to be by much.

Bad Weather and Irrational Behaviour

The Typhoon #8 signal was hoisted early on Friday afternoon bringing the working week to a premature close. The usual chaos ensued as everyone tried to head home on at more or less the same time.

One of the more interesting phenomena that happens every time the #8 signal gets hoisted is the dash for the supermarket. Huge numbers of people joined very long queues to buy enough food to feed an extended family for several days. Why they do this is beyond me. Buying enough to last for a day is both understandable and sufficient. Buying so much food that the supermarket shelves still look unnaturally depleted two days later is irrational. I have never seen a #8 signal stay hoisted for more than a day. So why do people buy so much more food than they are likely to need?

An Insurance Claim (2)

The insurance company has told me that my claim has been accepted without the need to have a damage assessment. I'll have to wait a few weeks before I find out whether they will reimburse the full cost of the new wine fridge or the price of the old wine fridge. There is about HK$1,400 difference.

An Insurance Claim (1)

Well this just sucks.

My wine fridge died on me on Sunday. The firm that supplied the warranty has gone out of business (which probably explains why it was so cheap) so I had to find another company to come and have a look at it. Unfortunately, this took two days. Some of the wiring has fused and the compressor has broken. The cost of repair would be about the same as the cost of a new one. It would also take a few weeks.

With my wine sitting in the Hong Kong heat (and experiencing accelerated aging) I want to get the collection back into a better temperature controlled environment as soon as possible. So today I bit the bullet and ordered a new one. I'm hoping it will be delivered on the weekend.

I've put in the insurance claim and am waiting for the inevitable dispute over the cost of the replacement.

What I don't know (and won't know until I start taking corks out of bottles) is whether a week of high temperatures will damage the wines. I'll open a couple of bottles on the weekend and see if they are ok.

Monthly Review - July

My net worth increased by 2.3% in July.

The year to date increase is 20.6%.

The return on my investments in the was positive (if only by a small margin) in spite of the volatility at the end of the month.

July was not a great month in terms of either spending (too high) or return on investments. However, given the state of the markets and the fact that a lot of the excess expenditure was a hang over from last month's lack of discipline I have to be satisfied with how the numbers ended up. Here are the details:

1. my unit trusts appreciated in value during the month. Strong gains at the start of the month outweighed the declines towards the end;

2. my residual share portfolio was almost unchanged;

3. my investment in silver was slightly up;

4. my tenants continued to pay the rent on time and rents continue to be higher than the expense component of the outgoings. The exception is the new flat which is being renovated. However, even though I have a small negative cash flow on the portfolio as a whole (a situation which will change once the new flat is leased) income is still higher than the expenses;

6. Expenses were high, but almost all of the excess was carry forward from June which I had made a provision for last month. The effect was felt in my cash flow not my balance sheet;

7. my income rose very slightly during the month.

The combined effect of the combined effect of the above resulted in a 2.3% increase in net worth at month end.

The only investment activities undertaken during the month were (i) regular monthly payments into two small cap investment funds and (ii) purchase of a very small amount of additional paper silver.

Looking ahead to August, I will have a minor cash outflow as I finish paying for the fit out cost of the new property. I will also see my income rise again.

Of course, as I type this the month of August is off to a horrific start. The local market was down over three per cent today. Most other markets in Asia also down sharply. Somehow, I do not think this year's succession of positive monthly return will be continued.