Treating the Symptoms - A Critical Review of ... - Civic Exchange

Lack of FinancingOne significant problem is the lack of mortgage financingavailable to owners of older properties. Hong Kong’s bankslend very conservatively in the mortgage market and aregenerally reluctant to offer mortgages on properties over10-20 years of age. They require both a higher downpayment and impose a shorter repayment period. Thestandard formula used by banks stipulates that the mortgagerepayment period + the age of the building should notexceed 40 years. Therefore, someone buying 30-year-oldproperty would only have 10 years in which to repay themortgage. Additionally, while someone who purchasesa new property can obtain a mortgage on up to 95% ofthe property’s value (partly subsidized by the Hong KongMortgage Corporation’s Mortgage Insurance Scheme), aperson trying to buy an older property is likely to be offereda much smaller loan. Ian Brownlee, who attempted toobtain a mortgage after his 1951 block of flats was privatelyrehabilitated discovered that banks were only willing tooffer a 50% mortgage.The effect is that this makes it difficult for owners ofolder properties to obtain the financing needed for repairthrough remortgaging. It also makes older properties lessattractive to individual buyers since they require such alarge down payment, thereby reducing the flat’s resalevalue. This further discourages owners from spending onmaintenance. These problems are recognized by the URA,which has introduced a preferential mortgage scheme forbuildings rehabilitated under its own programmes. 17banks have agreed to participate and offer rehabilitatedproperties a standard 70% mortgage on the property value,interest rates comparable to a 10-year-old building, and arepayment term of 55 years minus the age of the building.Additionally, the Hong Kong Mortgage Corporation(HKMC) has agreed to offer mortgage insurance equivalentto 15% of the property value, bringing the total mortgageup to 85%. This places rehabilitated buildings roughly onpar with a 10-year-old building on the secondary marketbut still does not approach the terms a borrower can obtainfor a new property. The programme is limited in scope— only buildings rehabilitated by the URA are eligible.Private owners who rehabilitate buildings on their own areexcluded.Why are banks unwilling to finance older properties? Onlypart of the answer has to do with the buildings themselves.With an assumption that buildings were made to lastonly 50 years, banks are reluctant to accept a property ascollateral if they are not sure if it will still be standing whenthe mortgage payment period ends. If the buyer defaults andthe property is foreclosed upon, banks are concerned aboutwhether the building will be in a good enough conditionto be worth the remaining value of the mortgage. 129 Sincebanks cannot accurately gauge a property’s condition orlevel of maintenance, they rely on a simple and conservativeage-based formula to minimize uncertainty. Other countriessuch as the UK overcome this problem by requiring olderbuildings to be surveyed and certified structurally soundbefore a mortgage is approved. 130 No such scheme currentlyexists in Hong Kong.The larger issue is the structure of the banking industry.Hong Kong’s banking industry is heavily reliant on theproperty sector. Between 2003 and 2008, loans for propertydevelopment and construction (including residential,commercial and industrial property) made up 24% of loansmade to all economic sectors. When one includes the valueof private residential mortgages in this figure, property canbe said to represent between 51% of the value of all loansmade in Hong Kong. 131 Banks rely on making large loansto developers, followed by supporting buyers of the newlyconstructed developments. This means that they have moreincentive to offer favourable loan terms on new propertiesthan on old ones, because this ensures that developerswill be able to sell their units and pay back their loans. 132Smaller banks are unable to fill the gap in financing oldproperties because they lack large enough deposit bases tooffer mortgages competitively, as neither developers northe government place deposits with them. 133 As developerssell their properties through agents, agents also have anincentive to promote primary sales over secondary sales.Economic historians have written about the symbioticrelationship that evolved between major developers andbig banks in Hong Kong. In 1979 HSBC offered CheungKong Holdings chairman Li Ka-shing a special untenderedbargain offer to purchase Hutchinson Whampoa, whichcemented Li’s economic rise and gained the bank anextremely loyal and very large client. 134 The concentratedHong Kong property industry generates such large profitsthat although HSBC is now a global bank, Hong Kong, asingle city of 7 million people, contributed 23.5% and 30%to its global profits in 2006 and 2007 respectively — morethan the rest of the Asia Pacific put together. 135Some bankers argue that government regulations andpolicies have exacerbated the situation, particularly thoseimplemented in the aftermath of the Asian Financial Crisisof 1997 in order to prop up the property sector. Conservativelending rules date back to the early 1990s, when the HongKong Mortgage Authority (HKMA), fearing speculativeinstability, established a non-statutory guideline requiringbanks to offer no more than a 70% loan on the value ofa residential property. It also required a minimum 10%deposit. 136 These rules were initially tightened during the1997 Financial Crisis as the government and banks worriedabout mortgage defaults.With the further collapse of property prices, the governmentdecided to create the HKMC to support the mortgagemarket. In 1998, the HKMC began offering an additional15% in mortgage insurance, and halved the deposit35