Rising Negative Equity 'No Cause For Concern' For Hong Kong's Banking System

by Mary Swire, Tax-News.com, Hong Kong

08 February 2006

The Hong Kong Monetary Authority has recorded a rise in the number of mortgage loans in negative equity for the second consecutive quarter, although HKMA chief Joseph Yam has moved to reassure investors that the increase does not pose risks to the stability of the territory's banking system.

Data released by the HKMA this week has shown that the number of residential mortgage loans in negative equity rose to about 11,000 cases, with a value of HK$19 billion in the fourth quarter.

The estimated unsecured portion of these loans stood at HK$2 billion. However, despite the second consecutive quarterly rise in negative equity loans, the HKMA was keen to point out that the number of mortgage loans in negative equity has dropped 90% from the peak of about 106,000 cases at the end of June 2003, in the wake of the SARS crisis.

Owing to the inclusion of loans marginally in negative equity, the loan-to-value ratio of the negative equity loans edged down to 113% from 114% at the end of the third quarter, the authority said.

Commenting on the figures in a report published by The Standard on Tuesday, the HKMA chief executive said the rise in negative equity loans was not a cause for alarm, and the banking system in the city remained sound.

According to Mr Yam, local banks are adhering to a rule limiting loans to 70 percent of the property value.

Furthermore, 'top-up' loans are covered by mortgage insurance, either through the Hong Kong Mortgage Corp or other insurers, Mr Yam was reported as observing.

The Hong Kong property market has been recovering steadily since the a slump, which began in the late 1990s, reached its nadir in mid 2003. However, rising interest rates in the latter half of 2005 contributed to a dip in prices during the last quarter, leading to the rise in negative equity.

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