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.