HONG KONG: Mortgage rates have fallen to their lowest level in 19 years as banks' fight for mortgage loan business escalates on risk-aversion moves.

The fierce fight for business in the mortgage market has forced banks to cut their offered rates to around 2 percent on average, lower than the 2.37 percent during the SARS pandemic period in 2003.

In some cases, banks even offer mortgage loans to prime customers at rates slightly below 2 percent.

The current level is the lowest since 1990 when mortgage lending rates were initially documented.

Financial institutions have been increasingly shifting their focus to mortgage business in recent months as the negative impact of the global financial tsunami and the subsequent economic recession gradually fed through the corporate front, making commercial lending riskier, analysts said.

"Mortgage loans are considered safer than other types of lending during periods of economic upheavals," said Paul Lee, a senior banking-sector analyst at Taifook Securites Ltd.

The significantly improved affordability of homebuyers has made mortgage loans safer, analysts said.

Lau Ka-fai, chief analyst at Midland Realty Ltd, notes that homebuyers of mass housing units now only need to set aside 20-30 percent of their family income on average for their monthly mortgage payment, compared with a crazy 90 percent during the housing market boom in 1997.

The higher affordability of homebuyers is due in part to currently lower property prices compared with boom periods in the past.

It is also attributable to generally cheaper cost for money as the financial market is flooded by liquidity after quantitative easing measures taken by governments around the world after the global financial tsunami.

The local financial system is currently flooded by as much as HK$500 billion in surplus liquidity after global "hot money" continued to flow in over the past few months, market watchers estimate.

The surplus liquidity in the banking sector is another factor that drives more bank money into the mortgage lending market, analysts said.

On the one hand, banks are still generally reluctant to lend to commercial borrowers, particularly to small and medium enterprises, on fears of increasing defaults and bankruptcies amid the poor economic environment, said Bonnie Lai, an analyst at CCB International Securities Ltd.

On the other hand, demand for commercial loans remained weak as trading activities remained sluggish over the past several months, the analyst said.

The trading and logistics sector is one of the four pillars of the local economy.

With weaker loan demand from the trading sector and an ample liquidity, banks need to find more lending business elsewhere in order to maintain their profitability, analysts said.

Banks need to aggressively boost their lending business now to maintain profitability after they saw a contraction in lending in early months this year, Taifook Securities' Lee said.

Data from the Hong Kong Monetary Authority, the city's de facto central bank, indicated that the aggregate loan volume in the territory dropped 4 percent in April from the beginning of the year due mainly to heightened fears about credit risk amid the economic downturn.

Analysts also note that shrinking interest spreads in the inter-bank market due to ample liquidity also make banks more aggressive to tap the mortgage market.

"If banks lend out their surplus cash in the inter-bank market, they will make much less profit," Lee said.

The Hong Kong inter-bank offered rate (Hibor) for six months is currently quoted at around 0.63 percent.

The historically-low mortgage rates have helped boost the so-called "little boom" in the local housing market recently.

However, how long the mortgage rates will stay low matters more to potential homebuyers.

Analysts see little room for mortgage rates to fall further but they generally believe that rates will stay at the current low level at least for the next six months.

"The current level is very low already. There won't be much room for further downward adjustment," CCB International's Lai said.

"However, mortgage rates could remain at a relatively low level for the next six months at least as loan demand will likely remain weak, with the economy unlikely to rebound strong in the next 12 months," she said.

(HK Edition 07/07/2009 page4)