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When similar mortgage rate rise in Singapore, what will happen to developer shares?

HK property developer shares fall after mortgage rate rise

HONG KONG — Shares of Hong Kong developers fell sharply yesterday after HSBC and Standard Chartered raised their mortgage rates there, raising the prospect of a correction to residential property prices finally occurring after numerous attempts to cool the market.

Sun Hung Kai Properties, the world’s biggest developer by value, dropped 3.3 per cent to HK$107.90 (S$17.40) and Henderson Land fell by the same amount to HK$49.55, underperforming the benchmark Hang Seng Index, which ended 0.28 per cent higher. Cheung Kong Holdings, controlled by Hong Kong’s richest man Li Ka-shing, declined 0.94 per cent to HK$115.70.

HSBC, the city’s biggest bank by deposits, raised home-loan charges priced at the best lending rate by 25 basis points, its first increase since 2011, after the city’s banking regulator tightened risk rules on concern a property bubble may undermine financial stability.

http://www.todayonline.com/business/hk-p...-rate-rise

I find the whole situation highly ironic.

The HK Government tried so many things to cool their property market - supply related measures and also tweaking the LTV ratios and such.

Now all it takes is a 25 bps upward adjustment and wa la! Magic. You have a correction coming.

Maybe they should have thought of this sooner?

Interest rates are not preferred tools i suspect because a Central Bank cannot control the mortgage rate directly and only via the discount rate.

Nonetheless i think with the amount of leverage/tenor of loans versus housing the prices will be v sensitive to interest rates.

If HKD is pegged to USD (bearing in mind HK is an open economy), will it be possible to have different interest rates from the US? Think about it....

V good point. Pegged currency cannot have different interest rates else generate arbitrage opportunity.

No the HKMA did not raise interest rates directly. What they did is administrative - they basically force the banks to hold more capital against their mortgage book. This then forces the banks to charge higher interest rates to cover their increased cost of capital set aside to support their housing loan operations.

This is my layman understanding. You basically need monetary / banking policy expert to work out how that translates to 25bps.

For Singapore I don't think MAS has the same policy tool - they don't manage the banks capital ratios here this way so this is probably not available for MAS. MAS I believe is more old fashioned and do not employ a risk weighing model to evaluate the adequacy of a bank's capital cushion - they basically use the entire book and said you cannot go beyond a certain size unless the capital is large enough regardless if it is safe lending or not.

If mortgage risk weight increase by 5% from 10% to 15%, and the cost of capital less earnings on capital is 5%, then the additional cost of capital is 5%x5% = 25bps


MAS also uses risk weight for mortgage. For example, LTV higher than 90% gets a risk weight of 100%, and LTV lower than 80% get a risk weight of 35%. But they don't usually adjust risk weights if they can control upfront using LTV.