28 May 2018
Cashed-up developers are offering up to 120 percent mortage in order to attact buyers. This is causing some concern to Hong Kong's banking regulators. Photo: HKEJ
Cashed-up developers are offering up to 120 percent mortage in order to attact buyers. This is causing some concern to Hong Kong's banking regulators. Photo: HKEJ

Why in-house financing makes perfect sense to developers

The Hong Kong Monetary Authority (HKMA) has launched seven rounds of counter-cyclical measures to tighten mortgage lending but property developers continue to offer mortgages with high loan-to-value ratio to attract homebuyers.

These loans can be as much as 120 percent of the value of the property. No stress test on the repayment ability of the potential buyer is required, nor is any proof of income needed.

This phenomenon is causing worries to the HKMA.

Deputy chief executive Arthur Yuen warned the public to exercise caution in an article on the HKMA website website.

“Buying a home is one of the most important decisions in life for many people,” Yuen wrote.

“Even though the short-term carrot may look attractive, potential buyers should take into account any changes that may occur in the future, carefully assessing their repayment ability and making a shrewd and prudent decision.”

Yuen said homebuyers should consider certain factors before making a decision.

For example, a property with a 90 percent mortgage will be in negative equity if home prices fall more than 10 percent.

If homebuyers don’t switch to bank financing with lower interest rates, they might not have enough money to cope with any spike in mortgage payments.

Yuen said the HKMA is committed to “maintaining banking stability… and containing risks in the banking system”.

“While property developers are outside our supervisory ambit, the fact that banks lend to property developers which, in turn, provide mortgage to homebuyers, indirectly increasing the potential credit risk faced by banks,” he said.

The HKMA could tighten oversight of banks to indirectly regulate developers.

It used the same approach in cracking down on mortgage loans by financial intermediaries last year.

Nevertheless, it remains unclear whether the strategy will work this time around.

Most local developers have strong balance sheets and sit on large cash piles. Many offer in-house financing.

In fact, providing mortgage loans to homebuyers makes a lot of sense for property developers. These help them boost sales instead of relying on reduced prices.

Also, developers can make a tidy profit from interest after one to three years when the discount on interest rates expires.

Mortgage loans are some of the safest assets. These are backed by tangible underlying properties.

Developers are in a much better position than banks even if they are forced to foreclose on properties if homebuyers fail to repay their loans.

Unlike banks in 1998, developers are not in a hurry to cash out these foreclosed properties. They could refurbish these flats and resell them.

Regulators have put measures in place to a prevent a market crash, so in-house mortgage loans have limited impact on overall financial stability.

This article appeared in the Hong Kong Economic Journal on June 21.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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