Hong Kong developers rush to offer bigger home loans to boost sales

Homes in Hong Kong are among the world’s most expensive, but getting a foot on the property ladder has become surprisingly easy recently, thanks to aggressive mortgage tactics by developers desperate to push sales in a falling market.

Offering home loans of up to 80 to 95 per cent of a flat’s value, without the need for proof of income, has become the sales tool of choice for many developers, allowing buyers to bypass strict guidelines on mortgages offered by banks but sparking concern that buyers may be setting themselves up for defaults and the loss of their homes should the economy remain sluggish.

“Developers provide a solution for those who cannot pass the banks’ mortgage stress tests. Recently, about half of the new flats sold have gone to buyers without regular incomes,” said Louis Chan Wing-kit, Centaline Property Agency’s managing director for residential.

These buyers, whatever their jobs, either had insufficient savings to make the down payment of 40 per cent of a flat’s value under banks’ standard mortgage lending requirements or were those able to pay upfront but whose monthly salaries failed to meet banks’ requirements, he said.

He expected some developers could even offer 100 per cent mortgages if the market deteriorated further.

After banks further tightened lending early last year, small developer Kowloon Development fired the first salvo in the new strategy six months ago when it offered buyers of its Upper East development in Hung Hom a second mortgage of 35 per cent of the flat’s value without the need for proof of income. The finance was made available through the developer’s financial unit. Such subsidiaries are not supervised by the banking regulator, allowing them to skirt the rules on bank lending.

Taken together with a bank loan of 60 per cent of the value, buyers would only need to put down 5 per cent, or HK$150,000, for a flat costing HK$2.79 million.

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The promotion stirred a frenzy of buying from people who bet home prices could rebound by the time the project is completed in 2018. Hong Kong home prices had soared more than fourfold since June 2003, reaching a record in September last year before retreating about 13 per cent.

More recently, buyers opting for developer loans climbed to a peak of about 22 per cent, or 121 cases, of the total mortgage primary market in February, according to mReferral Mortgage Brokerage Services. The number dropped to 34, or 5.8 per cent of total loans for new flats, last month, partly due to fewer project launches, according to Sharmaine Lau Yuen-yuen, mReferral’s chief economist.

“The trend for developers to provide higher mortgage ceilings to promote sales will continue,” she said.

Henderson Land Development’s finance company recently offered 95 per cent loans to buyers of its Wellesley luxury development in West Mid-Levels, and other major developers including Cheung Kong Property Holdings, Henderson and Kerry Properties are also providing mortgage loan plans, with some even waiving interest and repayment periods for as long as 20 months.

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Kerry has sold 50 units at The Bloomsway since it offered a five-year loan equivalent to 80 per cent of the flat’s value without a mortgage stress test. Buyers are only required to repay interest and principal from the second year. Semy Ng Mai-shan, Kerry Properties Real Estate’s general manager, said 90 per cent of buyers opted for the plan.

Alfred Lau, an analyst at Bocom International, noted that take-up rates for new projects in the New Territories were not as good as for those on Hong Kong Island and in Kowloon and Tseung Kwan O, given the abundant supply and the relatively large scale of projects in the more spacious New Territories.

As a result, many developers offered additional price cuts or mortgage support. In Yuen Long, CK Property’s Yuccie Square increased cash-back offers for some of the units, equivalent to a 2 per cent additional discount. K Wah International Holdings and Sino Land’s joint-venture development, The Spectra, and Kerry’s The Bloomsway in Tuen Mun provided interest- and repayment-free periods of up to 20 months.

“We expect further promotions, especially as the next rate rise may happen as soon as next month,” said Lau, referring to a possible rise in Hong Kong interest rates should the US Federal Reserve raise its rates in June, as widely predicted. The Hong Kong dollar’s peg to the greenback means rates move in tandem with those of the US.

And therein lies the risk behind these aggressive sales tactics.

Hong Kong’s economy is stuttering and mainland Chinese growth is slowing, sparking predictions of a 15 to 30 per cent decline in Hong Kong home prices by 2017. Together with the possibility of higher rates, rising unemployment and stagnant wages, the spectre of defaults hangs over both buyers and developers.

Midland Realty said there had been 35 default cases as of May 12, but 25 of the properties involved had been successfully resold. Last year, analysts said there were 200 default cases involving an estimated HK$100 million in deposits being forfeited by buyers.

Tony Tsang, an analyst at Deutsche Bank, wrote in a recent research note that under banks’ current lending policies, only 10 per cent of employed people would be eligible to buy a flat costing between HK$4 million and HK$8 million – the most common price range – if they were to rely only on themselves without a parental contribution.

“We believe this group is facing a high risk of unemployment now and their sense of job security is declining. Given a small eligible pool of homebuyers and worsening fundamentals for them, the current sales momentum may not be sustained,” he said.

The minimum monthly income needed to buy a flat in that price range would be between HK$39,184 and HK$45,182, Tsang wrote. As at February, 90 per cent of the employed people in Hong Kong, or about 3.4 million people, earn less than HK$45,000 per month and so would not qualify as eligible homebuyers.

As well as defaults, the number of home owners facing negative equity – when the value of their homes falls below that of the outstanding mortgage – is on the rise.

“Developers’ behaviour is contradictory to the banking regulator’s move to avert a property bubble in the past few years,” said Alvin Cheung Chi-wan, associate director at Prudential Brokerage.

“These highly geared homebuyers could fall into negative equity if there should be a deepening of the price correction,” Cheung said.

The Hong Kong Monetary Authority said last month that the number of negative-equity cases rose 14-fold to 1,432 in the first quarter of this year from the previous quarter, the highest number since the fourth quarter of 2011.

As the bank regulator, the HKMA said it had the responsibility of supervising banks to safeguard banking stability in Hong Kong, in written comments to the South China Morning Post.

“We do not comment on mortgage loans offered by individual developers. The HKMA has yet to see sufficient evidence to confirm a downward cycle in the property market. The authority will continue to monitor the situation closely and introduce appropriate measures in accordance with the development of the property market cycle to safeguard banking stability,” it said.

Under HKMA guidelines, banks can only provide a mortgage of 50 per cent of the value of homes costing HK$10 million or more for Hong Kong residents. For applicants whose main income is derived from outside Hong Kong, the mortgage cap is 40 per cent of the value of the home. For flats worth less than HK$10 million, the loan-to-value ratio is 60 per cent.

To mitigate default risks, banks are required to do internal stress tests on mortgage applicants, testing their ability to pay in the event of an up to three-percentage-point rise in interest rates.

At least some, however, are not swayed by the developers’ sweet deals.

Legislative councillor Kwok Wai-keung, 38, who earns HK$110,000 a month, is happy to wait and counsels young people to save more for a deposit than rush into a deal since repayments would increase after the first few years’ payment holiday.

“Buying a home is one’s life biggest decision and one should act prudently. It will be safe to borrow less,” he said.