HK central bank questions banks’ low mortgage rates

Source : Business Times – 19 Sep 2009

Reputation risk, interest rate risk and liquidity risk may not have been given due regard

HONG KONG’S central bank has warned lenders in the city that their ‘intense price competition’ on mortgages isn’t sustainable and may erode industry profit margins and increase risks.

Banks have cut home loan rates ‘to such an extent that they might not have given due regard to the reputation risk, interest rate risk and liquidity risk potentially associated with their pricing’, Hong Kong Monetary Authority deputy chief executive YK Choi said in a letter to the Hong Kong Association of Banks, which was published on the HKMA website.

Mortgage rates in the city are the lowest in at least 19 years, as far back as records are available, as banks seek to offset slower demand for other types of credit.

Lenders including Bank of East Asia Ltd and Standard Chartered plc have been offering homebuyers costs as low as 3.25 percentage points below the benchmark rate they use for calculating mortgage rates.

The central bank will approach individual banks to ‘understand their pricing strategy’, said Mr Choi, adding that once the cost to fund loans begin rising, banks may have to raise interest rates even faster.

Banks’ prime rates are currently 475 to 500 basis points above the Hong Kong Interbank Offered Rate, compared with the average spread of about 390 basis points over the past five years, he wrote. A basis point is 0.01 of a percentage point.

The current prime-Hibor spread is ‘exceptionally wide and can change rapidly’, Mr Choi said in the letter.

Banks should set mortgage rates with reference to the ‘long-term average spread’ to avoid having to raise rates quickly, he said.

The decline in Hong Kong mortgage rates has spurred a recovery in the housing market.

Home prices in Hong Kong have climbed 26 per cent this year, according to the Centa-City Leading Index, a weekly measure of residential values developed by Centaline Property Agency Ltd and the City University of Hong Kong.

Falling money-market rates have underpinned the mortgage price battle.

The three-month Hong Kong Interbank Offered Rate fell to 0.19 per cent on Sept 7, the lowest since January 2005, after the city’s central bank cut borrowing costs and spent US$23 billion defending the currency’s peg to the US dollar.