The change not only underscores the easy credit available, but also how difficult it is for Hong Kong regulators to restrict lending to developers as a way of reining in skyrocketing prices, which are already the world’s highest.

Watch: Why is Hong Kong housing so expensive?

“Vanke’s sudden change in the usage of the funds gives an impression that these buyers need additional financing provided by the developer. Otherwise, they may encounter difficulties in pushing through the purchases. The alarm is ringing loudly as home prices have risen to a risky level,” said Alvin Cheung Chi-wai, associate director of Prudential Brokerage.

Cheung said Vanke’s move indicated its quick response to the Hong Kong Monetary Authority’s tightened controls to prevent developers from offering generous mortgages to buyers.

The 983-unit development has nearly sold out, with one-bedroom flats going for about HK$9.6 million, a record price for such units at the development.

The robust sales were partly driven by mortgages of as much as 80 per cent of the flat’s value being offered by Vanke and New World, through a 20-80 entity, Ultimate Vantage.

With Vanke’s 20 per cent equating to HK$350 million, New World will be required to inject HK$1.4 billion into the finance firm. Together, they will provide HK$1.75 billion in mortgages, or 20 per cent of the HK$9.2 billion of sales revenue that Pavilia Bay will bring.

“Yes, home purchasers who took up these schemes will repay less in monthly instalments, but it will increase after the holiday period of about two to three years. By that time, their financial burden will increase as interest rates rise,” said Prudential Brokerage’s Cheung.

Likewise, buyers of Cheung Kong Property Holdings’ Ocean Pride, a stone’s throw from Pavilia Bay, were offered even more aggressive loan plans that covered up to 85 per cent of the flat’s value. That drew 14,000 prospective buyers to sign up when the project launched for sale last week.

In three rounds of sales, CK Property said it had generated HK$10.1 billion, selling 960 units.

“About 40 per cent to 50 per cent of our clients interested in buying Ocean Pride indicated that they will use the large mortgage loans provided by the developer or finance firm. But we do not know if they will change their minds later,” said Sammy Po, chief executive at Midland Realty’s residential market.

CK Property charges 2.25 per cent below prime for the first three years, and will match the prime rate from the fourth year. The prime lending rate currently stands at 5 per cent.

Under such terms, a buyer purchasing a flat for HK$6.25 million would be required to cough up a down payment of HK$1.25 million, or 20 per cent of the flat’s value.

The remaining 80 per cent, or HK$5 million, would be financed by the developer’s finance arm or other money lenders, which operate outside the regulatory oversight of the Hong Kong Monetary Authority.

Assuming a 25-year, HK$5 million loan at an initial 2.75 per cent rising to 5 per cent, the initial monthly repayments of HK$23,066 will increase 24 per cent from the fourth year to HK$28,544.

“If the [housing] price corrects deeply, the outcome would not be pretty. Highly leveraged properties of course would turn into negative equity at a quicker pace. But if a deeper correction occurs, they would not be the only group of buyers who suffer,” said Alan Jin, a property analyst at Mizuho Securities.

But cases of developer financing are relatively few, according to Denis Ma, head of research at JLL, and they are unlikely to have a significant impact on the housing market.

“Primary sales have accounted for only 30 per cent of sales in recent months and volumes, in general, remain at historically low levels. So, right now we don’t see them as being a trigger that leads to a major market correction,” he said.

Is Hong Kong’s property market heading for its biggest crash since 1997?

Hong Kong is a free market so the fundamental elements influencing price movements, such as interest rates, can be monitored and forecast, barring any huge external shocks. Buyers, therefore, have more time to adjust their strategies, said David Ji, Greater China head of research and consultancy at Knight Frank.

“In contrast, the mainland market is a more policy-driven market, which means that there are more unpredictable ups and downs where overexposure will lead to greater losses,” he said.

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