Unregulated finance firms add to risks of property bubble
The authorities must find a way to ensure rules on mortgage caps are adhered to before the market goes out of control
Shadow banking has become the boogeyman of finance around the world. It greatly contributed to the subprime mortgage crisis in the United States a decade ago and is exacerbating the property bubble on the mainland. Hong Kong may be facing its own version of risky lending. Two financial firms are partnering with the city’s largest real estate agencies to offer mortgages of up to 90 per cent of a property’s value.
By flouting the lending caps set by the Monetary Authority for banks, such companies are offering easy money and encouraging speculation. Once interest rates start to rise, perhaps as early as December, they will create greater risks for buyers and the housing market in general. They need to be reined in and discouraged. Even though the authority does not have the power to regulate such firms, it is not entirely powerless as it can compel banks to tighten their financial dealings with such entities.
Convoy Global Holdings, the largest of Hong Kong’s listed finance firms, and ETC Finance are teaming up with Centaline Property Agency, Midland Realty and Ricacorp Properties to offer the new mortgage schemes. These involve lending up to 90 per cent of the value of flats above HK$8 million, and up to 80 per cent for up to 30 years for units selling for more than HK$12 million.
The rates they offer are attractive, at between 2 and 2.5 percentage points below the prime lending rate of 5 per cent to 5.25 per cent. Their lending standards are also significantly looser than those used by banks. They also extend to lending for purchases of commercial units and shops.
By contrast, as part of the government’s market-cooling measures, mortgages made by banks are capped at 60 per cent of the value of homes between HK$6 million and HK$10 million, and 50 per cent for homes worth more than HK$10 million.
Of course, such risky lending is not new in Hong Kong. Some of the city’s developers in the past had offered similar mortgages. But a combination of official pressure and public criticism had made sure such lending practices did not become widespread.
The latest schemes follow a strategy by developers to switch from the mass market to selling luxury flats costing more than HK$8 million. The authorities should now put pressure on banks to stop providing credit to financial entities that flout the regulators’ mortgage guidelines and borrowers who take out risky supplementary mortgages. They also need to better educate homebuyers. None of these will stop speculators with a high-risk appetite and non-bank entities that are well-financed, but at least it will discourage most others.