Bank guidelines ‘effective’ to control property market

Friday, October 8, 2010
Issue 1134, Page 3
Word count: 868
Published in: Macau Daily Times

By Poyi (Natalie) Leung and Tiago Azevedo

Last Tuesday Macau’s Monetary Authority (AMCM) issued the new guidelines to tighten the loan-to-value ratio for mortgages to local banks “with the aim of ensuring stable development of banks’ residential mortgage lending”. Some experts say that while it is still too soon to be absolutely sure, this new set of rules might be effective in helping to develop a healthy property market.

“Since the guidelines are mandatory unlike the other ones that the Government usually issues to the banks, I believe they will have certain effects on the property market,” said the chairman of the Macau Association of Economic Sciences, Joey Lao Chi Ngai.

“As for how effective they are in ensuring sound and stable development in the real estate industry, we’ll have to wait and see,” Lao told the Macau Daily Times.

However, he added, “The guidelines must limit the banks’ freedom especially on the credit and mortgage businesses.”

Chief executive officer of Banco Nacional Ultramarino (BNU), Artur Santos, agrees with Lao. “These guidelines will not have a big impact on bank’s operation, but they will be useful to control the real estate market, especially when we talk about the upmarket houses,” Santos stressed.

The new rules set a maximum limit of 70 percent of the loan-to-value ratio. However, for properties with value less than or equal to MOP 3.3 million purchased by local residents, a higher ratio of up to 90 percent may be offered, subject to a maximum loan amount of MOP 2.31 million.

“The value of the property concerned should be determined by the lesser of the actual acquisition cost to the borrower or the estimate of value made by the banks,” AMCM said in a statement.

And apparently this was the right time to act. “It’s understandable that the Government decided to issue these guidelines now, trying to fight speculation and preventing an eventual housing bubble,” said José Morgado, CEO of Banco Espírito Santo do Oriente.

The new measures, Morgado added, will not strike a blow on local banks. “Macau’s banks are well structured and have a wide field of operation,” he explained.

However, Lao added, from the economic science’s perspective, “a government’s intervention in a free market is not necessarily an effective market operation”.

“I estimate that the Macau Government has foreseen that if the vicious competition persists in the banking industry, the banks will lose their rational thinking and approve excessive credit and loan applications, which will eventually pose unhealthy and unstable development in the industry,” he said.

“If one of the banks experiences a crisis or collapses, it will cause a tremendous blow to Macau’s financial market,” said the chairman of the Macau Association of Economic Sciences.

Act on two levels

According to Lao, AMCM issued the guidelines “to ensure a healthy development in the industry more than to control the property prices”.

“Excessive mortgage approvals can already be observed nowadays in Macau but the extent isn’t as big as in Hong Kong. I’m aware that the current practice of the local banks is completely opposite to the new guidelines,” he added.

BNU’s top-executive thinks the SAR Government is trying to act on two fronts. “On one hand, AMCM is trying to prevent local citizens from getting heavily indebted, while on the other is finding a way to lower the mortgage risk,” Santos told the MDT.

Even considering that local banks have “solid foundations”, José Morgado believes that the set of measures will be good to avoid any “unpleasant surprise”.

“Macau never had a problem with its banks, but that doesn’t mean that a less firm institution could not face those problems in the future,” he said.

“It is good to set up a group of rules to lessen the risk.”

Lao Chi Ngai expects the MOP 3.3 million boundary set in the guidelines “to cause inconvenience to users”.
“It’s hard to find private property below MOP 3 million in Macau nowadays,” he said.

“If a resident has to buy an apartment worth MOP 3.5 million – a normal price for a two-bedroom unit – under the new rules he still needs to pay more than MOP 1 million on his own as the down payment.”

Santos also believes that demand will drop, but not significantly. “It will have an impact on high-end property, but we will still have reasonably priced houses which higher ratio of up to 90 percent may be offered.

“At the end of the day, it will work to cool-down the property market,” he said.

Lao agrees: “The demand for low- to medium-priced property may increase but is not for certain. Instead the guidelines may cause the high-end property worth around MOP 3.5 million to drop below MOP 3.3 million, while those currently worth some MOP 1 million may rise to MOP 2 million after November.”

The new set of rules will come into effect from December 1, but Lao says this does not necessarily mean that more people will race to apply for mortgage loans.

“As far as I’m aware most of the potential property buyers have adopted the wait and see approach, as they want to see if the new rules introduced by the Government will somehow lower the property prices in the future.”

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