Refinancing of Mortgages is upsurging

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Chart from HKMA (Oct 2017) above shows the new loans approved each month from Sep 2014 to Sep 2017. Blue bars represent mortgage loans for 1st hand housing market, Brown bars represent mortgage loans for 2nd hand housing market, Biege bars represent refinancing mortgage loans. Left chart refers to the mortgage amounts, right chart refers to the numbers of mortgage.

Since the 1st Quarter of 2016, mortgage loans have been increasing. Mortgage loans for 1st hand and 2nd hand housing markets are more or less the same magnitude as in 2015 ($20b — $25b). However, the refinancing mortgage loans have been substantially increased from about 15% to more than 30%.

For example, figures from the latest survey (Oct 31, 2017 http://www.hkma.gov.hk/media/eng/doc/key-information/press-release/2017/20171031e7a1.pdf), mortgage loans for 1st hand, 2nd hand and refinancing amount to $6,311m, $13,921m, and $9,305m. In other words, refinancing accounts for 31.5% of total mortgage loans. In Aug 2017, the percentage was even up to 36.0%, the recent peak of refinancing. In Jun 2017, the total value of mortgage loans is also the recent peak and amounted to about $44b.

In the past, the average proportion of refinancing to total mortgage loans was only about 15%, the sudden upsurge may be due to two reasons:

  1. when the sale of 1st and 2nd hand markets is weak, if refinancing does not change, then the proportion of refinancing would be higher. This can explain the situation in the end of 2015.
  2. when refinancing is incentivised, or due to market changes that make refinancing attractive, then refinancing proportion can become high. This is more likely the case in mid 2017. When banks are flooded with hot money under the current ultra-low interest rate situation, and housing price has been increasing for 200% since 2003, there are many housing owners who are eligible to apply for refinancing (for a large sum). There are therefore incentives for both bankers and owners to engage in refinancing. Furthermore, with housing price has been increasing for more than 13 years, many young people have to rely on their parents’ financial support in order to pay the downpayments. Their parents usually have to withdraw cash by refinancing their housing units.
  3. This phenomenon, if the hypothesis is correct, can be risky as the downpayments for new purchases of housing units are indeed based on the collateral of existing housing units. The risk is highly concentrated within the housing market. Once the housing market is shocked, not only the new purchases of housing units that are at stake, the old purchases of housing units would also be liable to become negative equity.
  4. Unfortunately, the government has not taken any actions or risk management strategies on this upsurge of refinancing situation.

Written by

ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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