Hong Kong regulator warns on aggressive property developer financing
The Hong Kong Monetary Authority (HKMA) is increasingly concerned over the ultra-accommodative financing schemes being offered by some Hong Kong developers to lure home buyers. Schemes include providing buyers with up to 120% of a home's purchase price without undergoing a repayment ability stress test or proof of income. The regulator is reviewing whether rules need to be put in place to offset credit risk. “While property developers are outside our supervisory ambit, the fact that banks lend to property developers which, in turn, provide mortgages to homebuyers, indirectly increases the potential credit risk faced by banks,” HKMA's Arthur Yuen warned. 

The Hong Kong Monetary Authority has called for caution following Sun Hung Kai Properties' "aggressive" mortgage loan offer of up to 120 percent to homebuyers, marking the first time the SAR's de facto central bank aired its views on developers' financing schemes.

HKMA deputy chief executive Arthur Yuen Kwok-hang said developers' mortgage offers may heighten potential credit risks facing banks as they provide financing to some developers and moneylenders, which are indirectly burdened with risks posed by high-interest bearing loans.

He said HKMA views this issue with concern and it "has been discussing with banks and studying the need to introduce measures, strengthening the risk management of providing loans to these property developers."

While mortgage loans provided by developers comprise only a small percentage in the market overall, those provided by certain developers have risen several times in a year.

Last week, SHKP introduced a 120 percent mortgage plan for buyers of flats at its Park Yoho Venezia project in Yuen Long.

Under this scheme, a buyer has to mortgage his or her existing flat to an SHKP financing subsidiary before availing of the latter's mortgage offer.

The buyer does not need to undergo a repayment ability stress test and won't need to present any income proof.

Aside from SHKP, other developers offer loans that account for a large percentage of a new flat's value to lure buyers amid the ongoing downturn.

But SHKP is the first developer to offer an extra 25 percent loan to repay the mortgage loan for the buyer's existing flat which is also mortgaged to the SHKP financing arm.

Yuen has warned potential buyers that they may not be able to sell their existing flats during the transitional period. They might then end up with two homes whose prices are both falling.

He also asked potential buyers to think twice before availing of developers' offers, warning that mortgage rates may rise significantly after the promotional rates during the first few years of the loans.

With home prices falling, buyers should also be wary of the negative equity trap. Those who take out mortgages up to 95 percent of the value of flats may have to repay debts larger than the market value of their units if prices drop beyond 5 percent from today, he said.