Here's why Monetary Authority's lending measures is trouble for buyers

It's not just about higher interest rates.

According to Barclays Research, the unintended consequence of the HKMA’s mortgage lending measures is a more extreme cycle, dominated by property investors that think of their properties as liquid investments.

Here's more from Barclays Research:

This will ultimately lead to greater house price volatility. For investors, a ‘Minsky meltdown moment’ is now the most important asset in Hong Kong developers’ balance sheets.

Hong Kong’s US$-pegged, floating-rate mortgage market is increasingly resembling the adjustable-rate teaser mortgages of the US housing bubble.

Exceptionally low US$ interest rates and the uncertainty of any rate-adjustment timing – the ‘low for longer’ view – compounded by the underpricing of risk in mortgage lending by Hong Kong banks, in our view, has encouraged property investment and the hoarding of housing.

Simply put, when money is this cheap there is always trouble down the line.

Given the HKMA’s mandate and its limited policy tools – it has no interest rate setting powers – reducing bank exposure to property has probably been the right course of action as property price corrections that occur with banking crises are always deeper and economically more disruptive.

However, such downside protection should dispel any belief among investors that the Hong Kong’s de facto central bank believes that current property prices are supported by fundamentals. It’s a bubble in all but name.

Yet the ability of the HKMA to affect only the availability rather than the price of mortgage loans is likely to lead to more demand not less, especially from property investors faced with low deposit rates and a lack of alternative investment opportunities.

Given the nature of Hong Kong property investors, if a little exposure is good, far too much is never enough.

As a result, the HKMA’s administrative control of credit will make the cycle more extreme, and in the eventual forced tightening from higher interest rates and/or a strong dollar, the downside for property prices more significant.