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Response to 70%  Mortgage Loan to Value Rule

1 December, 1998 

The Honourable Antony Leung Kam-chung J P 
Managing Director & Regional Manager 
Greater China & The Philippines 
The Chase Manhattan Bank 
40/F One Exchange Square 
Central 
Hong Kong 

Dear Mr Leung, 

We are writing to you to express our strong support for your proposal that the 70% mortgage loan to value rule now be lifted. 

The Foundation believes that this is one of a number of elements of a comprehensive policy that needs to be put in place in totality if the SAR is to sustain a stable and affordable property market. 

In our view one of the key impediments, particularly to first time home purchasers, to qualifying for mortgages is their inability to accumulate the 30% down payment, rather than their ability to fund mortgage payments. It seems from recent research, carried out by A C Nielson SRH on commission of the Government, that meeting monthly mortgage payments is not generally a significant problem, even for properties purchased during 1996 and 1997. 

It has been argued that the 70% mortgage loan to value ratio is necessary to protect the banks in times of fluctuating property values. The implementation of this rule would not have been necessary in the first place if the Government had practiced a demand lead land disposal policy. For decades the Government has failed to make available sufficient land to meet demand. The result of this has been to encourage an unreasonably high level of speculative activity, which in turn has caused property prices to be unduly volatile. The 70% mortgage loan to value ratio was introduced principally as an anti-speculation measure, not actually as an asset value buffer for the banks. Fortuitously, it has turned out to be such a buffer in the present sharp property downturn 

In reality, what should be of much greater significance to the banks and to their regulator is the underlying ability of potential mortgagees to sustain their repayments over the term of the mortgage, rather than the risk of devaluation of the property. Furthermore, an international financial centre such as Hong Kong has no business micromanaging the asset allocation of its banks. 

Other key elements of a comprehensive policy to sustain a stable and affordable property market, are a long-term land disposal programme, a more competitive property development environment and a stable interest rate regime. 

The Chief Executive made an encouraging start towards implementing a suitable policy on land and property issues with the announcement of a five-year land disposal programme, but we believe his recent decision to suspend land sales until March 1999 was wrong. We feel it is important for property prices to be allowed to find their correct value and that it is detrimental for the Government to intervene by reducing land availability. This could cause property values to be underwritten at false levels and unreasonably restrain potential homeowners from being able to purchase, which in turn would result in an exaggerated further slump in prices and a prolongation of the current recession. 

The Foundation would recommend a rolling ten-year land disposal programme, reviewed every five years to adjust for any significant demographic changes or other factors. Reserve prices for land sold by auction or tender should be established and set at the cost of land production and relevant infrastructure provision. Developers should not be subsidized by the taxpayer and afforded the opportunity of purchasing land below it production cost. 

It is of considerable concern to us that a relatively small number of property developers account for around 80% of all domestic property development. We believe the Government needs to introduce procedures that can enable smaller property developers to participate to a greater extent. Examples of such measures would include offering developments in smaller sizes or more easily facilitating multi-developer participation in major projects, allowing deferred payment terms of land premiums or imposing a tax based on the developer's sale price and continuing to speed up the various authorization processes. 

With regard to the lack of stability in interest rates in recent months, it is our view that the HK$/US$ peg management policies adopted by the Hong Kong Monetary Authority have contributed significantly and unnecessarily to interest rate fluctuations, to Hong Kong's economic detriment. We greatly deplore the HKMA's failure to allow the currency board system to operate automatically as it was designed to do. We are concerned at the lack of a stable interest rate regime, as this is injurious to both a stable and affordable property market environment. 

While not related to the main issue addressed in this letter, we would briefly like to express our opinion that the HKMA's functions are too wide-ranging and that its banking supervision, fund management, market operation and development activities should be hived off to other institutions. The HKMA itself should focus on the operation of its currency board and a more effective governance regime. 

The Foundation would be most happy to meet with you to explain our views on this and other economic and public affairs issues in more detail. 

Yours sincerely, 

George Cautherley 
Vice Chairman