Thus the impact of this is far reaching and can provide insight into the future of Hong Kong’s property market as well as its overall financial infrastructure and how they can be affected. The reason for choosing this topic is therefore to study as to how this credit crunch will affect the world markets in general as well as Hong Kong Market in particular.
Current credit crunch is largely perceived as the main reason behind the collapse of the property market in international system. The reason as to why credit crunch resulted into the collapse of the property market can be traced back to the subprime mortgage crises which emerged due to the imprudent lending practices of the bank. By definition, a subprime borrower is a borrower whose credit has not been entirely satisfactory due to historical defaults on payments against loans taken. (Budworth,2009). However, such borrowers offer more lucrative options for the banks and financial institutions to lend because of their higher risk. High risk borrowers are often charged high rates therefore there is always a chance to earn high on such relationships.
Based on this simple principle of risk and return banks and financial institutions started to lend to their subprime borrowers especially in mortgage markets. However, banks and other financial institutions, at the same time, also started the process of securitization through which the mortgage portfolio held as security with the bank were bundled and securities were sold out against such collaterals in the open market. The basic purpose was to recoup the liquidity lost in making the loans to subprime borrowers.
Crises in property markets started to emerge when subprime borrowers started to default on their commitments and as such banks have to pay out to the holders of mortgage backed securities through other means as with the default of the borrowers a mismatch in cash flows were created. The ...
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“The Property Market at World Level ( Credit Crunch Affected ) and How Essay”, n.d. https://studentshare.net/miscellaneous/382906-the-property-market-at-world-level-credit-crunch-affected-and-how-this-goes-for-hong-kong-market.
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