Warning to Hong Kong's home buyers over developers' aggressive financing plan that risks negative equity

Hong Kong developers are offering unprecedented home financing schemes to boost sales over the past two months, putting hundreds of “marginal” buyers on the verge of falling into negative equity if there is a 10 per cent drop in home prices.

To speed up sales amid fierce competition and tightening mortgage policies, some developers are skirting bank regulations by providing up to 95 per cent of home loans through their wholly-owned financial institutions to lure buyers.

“These purchasers are young, first-time buyers and mostly financially vulnerable. They have to seek the highest loan-to-value mortgage loan, you can tell it is very unhealthy at the moment,” said Louis Chan Wing-kit, the managing director of Centaline’s residential department.

Among the 1,200 tiny flats being sold since August, he believed 30 per cent of these transactions took place under developers’ financing scheme of 90 per cent or 95 per cent loan-to-value ratio.

“In theory, these buyers will immediately fall in negative equity once home prices decline 5 to 10 per cent,” he said.

Centaline Property Agency said its Centa-City Leading Index, which tracks secondary home prices at 100 housing estates, dipped 1.76 per cent from early last month to 144.33 for the week to October 18. The index has risen 7.9 per cent so far this year.

“It is the first time I have ever seen developers provide first and second mortgages to woo buyers,” he said.

While Chan predicts home prices could tumble 10 per cent from now to December, other investment banks have forecast a 10 per cent to 30 per cent fall from now to 2017.

Negative equity happens when the housing loan exceeds the market value of the property.

When the Hong Kong Monetary Authority (HKMA) tightened the loan-to-value ratio to 60 per cent from 70 per cent for flats worth under HK$7 million in February, developers have to adopt more aggressive financing schemes to help potential buyers.

Henderson Land Development, which is the latest developer joining the aggressive home financing scheme bandwagon, managed to sell 95 per cent of the first batch of 162 units when it launched Eltanin Square Mile project in Mong Kok on Saturday.

With that kind of preferrable financial aid in place, buyers of Eltanin Square Mile could receive 30 per cent loan-to-value mortgages on top of the standard 60 per cent mortgage a buyer can get from a bank.

Rivals including New World Development, Kowloon Development and Far East Consortium International are just requiring potential buyers to put down as little as 5 to 10 per cent of the property’s cost, compared with 40 per cent instructed by the HKMA.

Among them, Kowloon Development is the most aggressive as its offers home loans of up to 95 per cent of the flat value, a 30 year term and without submission of income proof to drum up sales for its small flat project, Upper East, in Hung Hom. The loan will be offered by its wholly owned financial institution which is not subject to HKMA supervision.

The project, due to be completed in August 2018, recorded the largest number of default cases amid slowing economic growth and an imminent interest rate increase. Of the 30 default cases in the primary and secondary market, about 20 deals at Upper East saw buyers back out of the purchases.

Alfred Lau, a property analyst at Bocom International, said these buyers would have locked up for two to three years as flipping uncompleted flats were prohibited. “Some panic buyers prefer to walk out of the purchase deals over fear of a further fall in home prices,” he said.

According to HKMA data, the number of homeowners with negative equity fell to zero, from its peak at 105,697 in July 2003, at the height of a property downturn where home prices plunged as much as 70 per cent.

In a reply to South China Morning Post, HKMA said “it has in many occasions reminded members of the public to carefully assess their financial position before deciding whether or not to proceed with a property transaction and how the transaction should be financed.”

The HKMA will continue to monitor market developments and provide further guidance to banks if necessary, it said.