Motion Debate on The 70% ceiling for Residential Mortgage Loans

Madam President, I move that the motion, asprinted on the Agenda, be passed.

Madam President, under the special economic conditions of Hong Kong, many people who have made money from business or employment will invest inproperty. That is, they will buy property for self-occupation or buy propertyand then let it out for rental income. Speaking of investment strategy, people indifferent places of the world may invest in different ways. But insofar as Hong Kong is concerned, most people will buy property with their savings or capital. Indeed, we can see that over 1.4 million families in Hong Kong own their own properties, among which some 1.1 million families have purchased their properties from private developers, whereas the other 300,000-odd families have purchased flats under the Home Ownership Scheme (HOS). Such being the case, if secondary residential property prices fall or when properties in the secondary market cannot be sold easily, many people in Hong Kong will be greatly affected.

The current interest rate is much lower than that in 1997. The Prime Rate (P) back then was high and so, no matter how hard one tried to negotiate, one had to pay interest at a rate of 10%. Now that the interest rate has come down. The P has also come down substantially. So, the interest rate payable can be lowered to P minus 2.5% or P minus 3%, with the interest rate actually ranging from 2.5% to 2.8% in most cases. So, the resultant situation is that despite the economic downturn and the fact that most wage earners have not been given a pay rise, the burden of monthly mortgage repayment has become far more stabilized than before, judging from the current status of mortgage loan repayment. So, as the banks have said, the risk of, say, defaults on mortgage loans by borrowers who cannot continue to service the repayment, or the repossession of mortgaged properties by banks, has been reduced. But today, secondary residential property prices are very much lower than the level a few years ago.

Madam President, I wish to say a few words on the range of measures recently introduced by the Government to stabilize the market. I think they are very useful. But in the short term, I am still of the view that these measures will be more helpful to first-hand properties than to the second-hand ones. It is because for first-hand properties, apart from the provision of bank loans amounting to 70% of the value of property, most developers are also willing to lend buyers loans at 25% of the value of property, or even pay for owners their legal fees, decoration costs, and so on. This shows that buyers can buy a flat without having to pay much. But for second-hand properties, quite on the contrary, the owners are faced with far greater difficulties. More often than not, even if they are able to find a buyer, the buyer may have difficulties in securing loans because the buyer can normally secure a loan only being 70% of the property price. Owners of second-hand properties generally do not have the means to play the role of banks or developers by receiving 70% of the property price first and then allow the payment of another 25% by the buyer at a later stage. Owners of second-hand properties do not have the means to do so. As a result, the transactions of second-hand residential properties are far less active.

The Liberal Party interviewed over 1,000 owners of private properties by telephone between 9 and 29 October — Madam President, the interviewees are all owners — asking for their views on the proposed measures to stabilize the property market and asking them which measures are, in their view, more important. They considered such measures as the moratorium on land sale or cessation of the construction of HOS flats useful, but took the view that they might be effective only in the long run; 43% of the owners of second-hand properties considered the relaxation of the 70% ceiling for residential mortgage loans most important, because if the ceiling could be relaxed, it would be easier for them to sell their flats.

Certainly, from the perspective of banks or the Government, or according to consistent line of the Hong Kong Monetary Authority (HKMA), the stability and security of banks must be protected. I trust the Liberal Party and most Honourable Members will support this absolutely. It is definitely not our wish to see a crisis emerge in the banking system, because the majority of the deposits in banks belong to the general public. Should there be problems in the banking system, many depositors who have deposited their money in banks would certainly be victimized. This is the last thing we wish to see.

On the other hand, insofar as the prevailing property prices are concerned, would the ceiling for residential mortgage loans be abolished just because we have put forward this proposal to the Government or the HKMA? We are not suggesting that banks should offer loans amounting to 90% or 100% of the property prices. We are only asking for the abolition of the ceiling for residential mortgage loans. Prudence is a major principle of banks in financial management. Prudent lending practices mean that the security of the borrower's job, how much the borrower is making in income, how good the borrower's repayment ability is, and so on, will be considered. Banks have all along been doing this, and this is also what they should be doing.

We have also noticed that with regard to the ceiling for mortgage loans, in such English-speaking common law jurisdictions as the United States, Britain, Canada and Australia, property transactions have been very active, but none of them has set a ceiling for mortgage loans. It is true that banks in the United States, especially those that specifically deal with savings and loans, did run into problems in the '80s and '90s. But overall, we cannot conclude that their problems were attributed to the absence of a ceiling for residential mortgage loans in the banks of the United States, Britain, Canada and Australia. Nor can we conclude that the provision of loans amounting to 70% or 80% of the value of property by their banks has led to instability in banks and consequently caused problems in their banks. This is not the case. We are very confident, for banks in Hong Kong have always been prudent in respect of loans (that is, lending people money to do business) and will conduct in-depth studies. In fact, banks can still say to people approaching them for loans that they can be provided with loans amounting to 75% of the value of property, and that if their repayment ability is relatively high, then banks can provide loans amounting to 90% of the value of property.

Of course, the banking sector has reservations and this, I do understand. This proposal of the Liberal Party also has regard for this point. That is why we ask the Government to look into the possibility of improving the conditions and procedures for vetting and approving applications under the mortgage insurance scheme, "or" relaxing the guideline for banks on the 70% ceiling for residential mortgage loans; I have used the word "or". In fact, the objective will be achieved as long as the Government can give effect to either of the two options. Of course, speaking of insurance, if Members have paid attention to it, they can see that the work of the Hong Kong Mortgage Corporation Limited (HKMC) was not too successful at the beginning. Why? There are a number of reasons.

For one thing, their processing of applications was slow. Before loans were approved, vetting normally took about one and a half months. Significant improvement has been made recently in that vetting will take two to three weeks. Besides, they used to charge a very high premium for the loans but the premium has also come down recently. This may be due to this motion proposed by us. We had waited for a very long time for the turn of this motion, today, we have this motion debate finally. However, a lot has indeed been done in the market to improve the situation. Yet, we have also noticed that many people do not qualify for the mortgage insurance scheme. For example, a requirement for application is that at least one of the applicants must be first-time home buyers. That is, if both the wife and the husband are not first-time home buyers, their application will not be approved. Moreover, other than doctors and lawyers, self-employed persons are not eligible to borrow loans under this scheme. So, in my proposal I call on the Government to study with the HKMC the possibility of relaxing the schemes. This will be of greater help to buyers of secondary residential properties.

Furthermore, I also wish to ask this: Is it true that these schemes can be launched only by the Government through the HKMA or a government-owned mortgage corporation? In fact, such schemes should be provided by the private market. The financial services sector can also have a part to play in this business. It is most desirable that the Government should not be involved. Rather, the financial companies (not banks) should be doing this. That is, they should be allowed to provide loans amounting to 90% of the value of property, and the proportion borne by banks should not exceed 70% at the most. A higher interest rate can then be charged for the other 20% of the loan, in a manner like insurance. I think this really gives no cause for much criticism.

Obviously, since an interest rate of 2.5% is charged for a loan amounting to 70% of the value of property, many people will consider it most desirable if the same interest rate is also charged for a loan amounting to 90% of the value of property. But we must understand that if the lender has to lend as much as 90% of the value of property, even if an interest rate of 2.8% is considered too high, it is still impossible to ask for a 2.5% interest rate, or should it be pitched at 2.7%? The difference between a loan amounting to 70% of the value of property and one amounting to 90% of the value of property lies in the level of risks. The business is worth it only if lenders who bear greater risks can have a better rate of return. On this point, I think the broad direction of the Government is correct.

We have proposed this motion today in the hope that the Government can consider the two possibilities proposed in the motion. If that could be done, I think the secondary property market would become more active, in which case owners of second-hand properties would be able to find suitable buyers more easily. If owners of second-hand properties can sell their flats, I believe more of them will then buy first-hand properties or buy another property after selling theirs. In that case, the Government's revenue from stamp duty would increase. So, this would be beneficial to the economy as a whole.

I beg to move. Thank you, Madam President.