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Hong Kong is trying something else in efforts to deflate its property bubble. Its monetary authority has hiked capital requirements for residential mortgages, prompting two of the city state's biggest lenders to raise interest rates. It is the first time the activist watchdog has publicly tweaked lenders' risk models. For western regulators, it's an important test case.
The Hong Kong Monetary Authority is not shy about intervening in the property market. Scarred by the post-1998 crash, when prices halved over five years, the regulator has been granted a range of bubble-pricking powers. Prospective buyers have to deposit at least 40 per cent of the property's value before they can get a mortgage. Interest costs are capped at 50 per cent of the borrower's income. And Hong Kong's government has attempted to squash speculation by raising stamp duties for existing homeowners and foreigners.
Even so, the HKMA is now breaking new ground. The regulator recently set a floor for the risk-weightings that banks use when calculating the capital they need to hold against residential loans. In future, each dollar of mortgage lending will carry a minimum risk-weighting of 15 per cent. Previously, the risk models used by most Hong Kong banks produced average risk-weightings of less than 10 per cent. So, in effect, the capital cost of a Hong Kong mortgage has risen by more than half.
There's no guarantee that the HKMA's latest intervention will deflate the bubble. Borrowing curbs have so far slowed – but not reversed – rising prices. Some of the recent boom is the result of capital fleeing mainland China, rather than being caused by excess debt. What's more, the HKMA's intervention may just prompt speculative borrowers to switch to other sectors, like commercial property.
Yet the rest of the world will watch with interest. Following the 2008 crisis, regulators in the United Kingdom and elsewhere are seeking the power to use risk-weightings to rein in lending in certain sectors. The jury is out on whether such tools work: one worry is that they will make it harder to compare banks' capital ratios. Moreover, most Western economies are currently suffering a shortage of demand for credit, not an excess. Even so, the HKMA is offering a practical test in what so far has been a mostly theoretical debate.