Hong Kong banks are big on property, regulators urge caution

[HenryTo]

Quote: "What drives the Hong Kong economy at end of the day is property, property, and property. It's not technology or manufacturing," said Leland Sun, chief executive of Pan Asian Mortgage Corp.

I don't agree. Hong Kong is one of the world's financial centers, and that is why property prices in Hong Kong are so high. People just don't go in to a certain place and buy property at inflated prices for no reason at all - even though HK is very much a crowded city with a low supply of land. The ST outlook of Hong Kong property prices very much depends now on China, and the U.S. stock market and U.S. economy, I believe. I am somewhat cautious now because of the breakdown of the Bank Index and because of the potential overheating in the Chinese economy. Stay tuned.

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Sunday February 27, 11:37 AM

Hong Kong banks are big on property as real estate boom gathers strength, regulators urge caution

Hong Kong's banks and other financial institutions are betting big on the territory's recent property boom, offering products that enable consumers to buy posh apartments with no cash on hand. But regulators and the International Monetary Fund warn that over-reliance on property may prove risky.

After a six-year slump following the 1997 Asian financial crisis, real-estate prices in Hong Kong are resurgent. For instance, the government has earned 19.9 billion Hong Kong dollars (US$2.6 billion) from land sales for the 2004-5 fiscal year so far - almost triple its projection.

Banks and finance companies are angling to cash in on the boom.

The territory's central bank, the Hong Kong Monetary Authority, or HKMA, asks banks not to make residential mortgage loans of more than 70 percent of a property's value. But third parties such as mortgage insurers or finance companies can step in to offer "credit enhancement," allowing consumers to borrow almost the entire cost of a home.

Combined with the cash rebates often offered by property developers and banks, it's possible for someone to buy an expensive Hong Kong apartment without putting down any money at all.

HKMA Chief Executive Joseph Yam, however, has flagged the trend as a possible worry, noting that banks may be getting too eager in their drive to expand their mortgage loan books.

"The competitive environment may cause banks to take risks we don't want them to take," Yam told legislators recently, while adding that "banks don't believe it's a major cause for concern."

Hong Kong banks' financial health is strong. They have very low bad-loan ratios and large capital reserves. Still, others are also warning against the new enthusiasm for property.

"While property loans have not proven riskier than other loans, their share in total loans has increased and this concentration could represent a more significant source of risk in the future," the IMF said recently. "The staff urges continued vigilance in monitoring bank lending to the property sector."

But one mortgage finance company says there's little prospect that the banking system will cut down its dependence on property.

"What drives the Hong Kong economy at end of the day is property, property, and property. It's not technology or manufacturing," said Leland Sun, chief executive of Pan Asian Mortgage Corp.

"If you look at other economies, banks aren't so heavily reliant on property lending, though Thailand, Taiwan, and Singapore are probably not too far behind," Sun said in an interview. "I think it's a fact of life now. Banks (in Hong Kong) don't have any other business to do."

Property has traditionally been a safe bet for Hong Kong banks, as well as one of the only sources of growth in a market where demand for other kinds of loans has been stagnant.

During the decline in property prices after the financial crisis, Hong Kong banks saw only a small pickup in default rates. And an epidemic of negative equity _ properties whose market value had fallen below the amount of the mortgage _ never became a threat to the financial system, despite many warnings.

The growth of new forms of financing is a fresh factor. But Sun said the financing options offered by his company and others only match what is widely available in other developed financial markets.

He added those who chose to borrow heavily to finance housing purchases only make up 10 percent to 15 percent of the market, saying "it's definitely not a systemic problem by any means."

"Most people who buy property in Hong Kong still put 30 percent down," he said.

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Andrew Batson is a correspondent for Dow Jones Newswires.