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Hong Kong home foreclosures climbing as unregulated lending takes a toll
[HONG KONG] Home foreclosures in Hong Kong have been rising and are likely to pick up pace as more owners default on high-interest loans from unregulated lenders in a weak economy, according to specialists in distressed property.
The territory's authorities don't officially track foreclosures but data from the de-facto central bank, the Hong Kong Monetary Authority, shows that there are a growing number of homes that are worth less than the amount paid for them.
The number of homes underwater reached a five-year high of 1,432 at the end of March, and the HK$4.9 billion (S$851 million) of properties concerned is the highest since the global financial crisis in 2009. At the end of December, there were just 95 cases worth HK$418 million.
Non-bank finance companies have seen an increase in delinquent loans since the fourth quarter of last year and foreclosures are also now picking up. Members of the Hong Kong Property Finance Association (HKPFA) now have about 10 delinquencies per 100 loans made, compared with five to six last year, and foreclosures are running at around four per 100, up from two to three in 2015, according to its Chairman Alfred Lam.
For a city that relies on property-related businesses for about a fifth of its economy, any major distress in the apartment market would be a body blow. Hong Kong's gross domestic product contracted 0.4 per cent in the first quarter from the last quarter of 2015, hit by falling exports and weak consumer spending as a faltering Chinese economy took a toll.
It could also trigger questions about whether the HKMA should get a tighter grip on non-bank financing.
Banks are heavily regulated in the Chinese territory. Seven rounds of property sector cooling measures introduced by the HKMA since 2009 have cut the official loan-to-value ratio on residential properties - the maximum amount a bank is allowed to lend on a property - to a maximum 60 per cent, and as low as 40 per cent in some circumstances.
But the same does not apply to finance firms and real estate developers. And buyers have in recent years got around the bank rules by taking out loans from these other sources and borrowing up to 90 or 95 per cent of the value of the property. In some cases they are even being offered the chance to borrow more than 100 per cent of the value.
That is fine when prices are rising but it doesn't take much of a decline to put these borrowers under water - which has been happening as the Hong Kong economy has struggled and home prices have dropped 11 per cent from a September 2015 high. Hong Kong household debt is also at a record high of nearly 70 per cent, according to the Bank for International Settlements.
The situation is made worse by the repeated use of apartments for collateral in other unregulated transactions, including loans for stock trading.
"More people (are) using their properties as collateral," said AA Property Services managing director Tsang Kit-chun, who auctions foreclosed properties.
"Those who suffer a loss from the stock market are unable to pay back the mortgages."
AA has auctioned about 80 foreclosed residential properties this year and is expecting to auction more than 200 by year end, Mr Tsang said. There were only about 100 such auctions last year. Another major Hong Kong auction house, CS Auctioneers, also said it expected foreclosures to increase with a worsening economy.
Hong Kong real estate investor Jacinto Tong, whose company Gale Well Group has more than HK$35 billion invested in the residential and commercial property markets, said high interest rates demanded by finance companies was a major risk. Tong, who published a book on the stresses in Hong Kong's residential property market last year, said there were currently about 1,000 properties where buyers had missed payments and lenders had the right to foreclose.
The distress is increasingly rapidly, he says. Mr Tong warns that by the end of the year, there could be missed payments on 15,000 properties, with finance companies foreclosing on about 10,000. His estimate is based on the number of properties that mortgage agencies have told him are pending transfer to other finance companies - which he said often means the borrowers can't make the original payments.
The finance companies typically charge between 10 and 30 per cent interest compared with two per cent from banks, and their loans typically last one to five years rather than banks' 20 or 30 years. They often provide mortgages to people who banks have turned away because they don't have a steady income or can't prove it.
Some of those analysing the problem say they don't trust the official data to provide a full picture of the leverage in the home loans sector. The HKMA data is also 17 months old - the last time it measured finance companies' bank loans was in December 2014, before the worst of mainland China's economic slowdown and the market crash that wiped a third off the value of its stock markets.
"I don't think there's a lot of transparency. It is a problem," said Moody's Investors Service Senior Analyst Sonny Hsu, who called finance companies a "blind spot" and recently raised the issue with the Hong Kong Monetary Authority (HKMA) and a number of banks, who he said gave him verbal assurances it wasn't a systemic problem.
In its most recent published statements on the issue in the spring of 2015, HKMA downplayed the risk posed by finance companies in the property sector.
It said the total value of banks' credit facilities to finance companies was less than 0.4 per cent of total loans and that the total value of loans with property as collateral was HK$9.2 billion, accounting for no more than one per cent of outstanding residential mortgages.
However, it also acknowledged the data excluded "a vast number of other finance companies" that don't have relationships with banks.
When asked for updated data, an HKMA spokesperson said in a written reply that the bank did not regulate finance companies but neither did such companies have a "systemic implication".
The spokesperson also said that the HKMA had advised banks last year to cut credit lines to finance companies lending above HKMA guidelines and to lower debt servicing ratios for borrowers who exceeded certain leverage thresholds.
As much as 10 per cent of the market may be operating outside of the HKMA rules, according to brokerage Ricacorp. Five years ago, there were just over 800 registered finance companies, according to the Companies Registry. Now there are more than 1,600.
The situation is severe enough to make finance companies ease back, said HKPFA official Mr Lam.
"Nowadays I seldom see finance companies finance up to 70 per cent of the property value because 70 per cent today next month is maybe already 75 percent and 3 months later is 80 per cent," Mr Lam said.
Still, some of the biggest property developers seem less afraid. One, Henderson Land Development Co Ltd, recently began advertising first-time mortgages of up to 95 per cent in partnership with an unnamed finance company.
Another, Sun Hung Kai Properties Ltd, has started advertising loans worth 120 per cent of the property value.