Negative Equity In HK - A Precursor & Benchmark

The number of Hong Kong homeowners in negative equity quadrupled to nearly 11,000 in the last quarter of 2008 as the financial crisis took its toll on property prices. And analysts expect the figure to double this year as property prices fall by a widely expected 10 to 15 percent. Residential mortgage loans in negative equity increased to 10,949 at the end of December from 2,568 at the end of September 2008, according to the Hong Kong Monetary Authority.

What is negative equity: it means the amount you would still be owing after you sell the property and pay off your mortgage. For example, if you bought a house for 600,000 and you borrowed 500,000, which meant that you paid 100,000 as downpayment. Now the house is only worth 450,000 hence your negative equity would be 500,000 - 450,000 = 50,000. Negative equity is 50,000 but in actuality you have already lost 100,000 (downpayment) + 50,000 = 150,000 (not including the many monthly payments may have already made on the property).

HKMA chief executive Joseph Yam Chi-kwong said the increase was anticipated and that it will continue. "But I don't expect the situation will be as bad as in 1998 to 2003. Property prices are tending to remain stable at a certain level," he said.

While the developments are to be expected, what is more important is to see the negative equity figure as a benchmark as a severity of the recession. We must remember that Hong Kong saw a peak of 105,697 negative equity cases in June 2003 amid the SARS outbreak. So 11,000 is still very acceptable. But the the flip side is that the number in negative equity will rise exponentially and very swiftly if property prices were to slide in greater quantum for the next 6 months. Possibly another 10% slide in price would bring the negative equity figures close to the 2003 SARS level.

Pan Asian Mortgage Advisory economist Alvin Ho predicts the number of negative-equity homeowners will increase to more than 20,000 this year if property prices continue to decline. Real estate prices in the secondary market dropped 20 percent to an average of HK$3,410 per square foot in the fourth quarter from last year's peak of HK$4,251 psf, according to Midland Realty. The HKMA said the aggregate value of mortgages in negative equity rose 313 percent to HK$24.8 billion in the fourth quarter from the previous quarter. The unsecured portion of these loans rose to HK$2.7 billion. The loan-to- value ratio of the loans increased to 112 percent from 107 percent. The three-month delinquency ratio of negative equity mortgages fell to 0.05 percent from 0.08 percent.

Meanwhile, Yam said companies in Hong Kong have more than HK$100 billion in syndicated loans that are due to expire this year. The HKMA will take appropriate action and "the government should keep an open mind" to help financing, he said. "Foreign banks based in Europe and America may have to handle their own problems at headquarters by deleveraging. Their foreign business will then be affected." However, Chinese University associate finance professor Raymond So Wai-man warned that the government will come "under great pressure if it helps companies refinance debt."

Yam said there is a risk that protectionism could spread from trade to finance. As an example, countries are no longer buying US Treasury bonds. The HKMA intends to cancel its temporary provision of additional funds to banks at the end of March but will review the facility at that time to decide if it needs to be extended.

Amidst all the planning and forecasting, HK should remember that its monetary policy, property price and hence stock market are tied to their currency peg. The USD has been injected with a huge array of new "fundamentals" over the last 6 months - HKMA should really reconsider the HK dolar peg because the "integrity, outlook and volatility of the USD" going forward will be more like a horror movie. You cannot have your currency tied to highly risky, highly indefensible monetary expansionary policies somewhere else... the USD by virtue of their actions over the last 6 months have basically sentenced the dollar to a long drawn out period of weakness and losing stature as a reserve currency.