Nonbank Lending Jumps as Hong Kong Prices Hit Record

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Hong Kong’s nonbank lenders are thriving as regulators place curbs on banks, adding to the risks in the city’s hot housing market.

Homebuyers are flocking to companies like Hong Kong Finance Group Ltd., which has seen a 15 percent surge in mortgage inquiries after bank loans were capped Feb. 27. Developers also are teaming with finance companies to fund buyers faced with soaring home prices and smaller loans from traditional lenders.

Nonbank lenders in Hong Kong have been booming since regulators began restricting bank mortgages in 2009. Last month, the Hong Kong Monetary Authority capped loans at 60 percent of the value of a property costing less than HK$7 million ($900,000), down from 70 percent. Nonbanks, which charge interest rates eight times higher than traditional lenders and offer 90 percent financing, are seizing the opportunity created by mortgage rules.

“In the past, a 70 percent loan was more than enough,” said Sharmaine Lau, chief economic analyst at mReferral Mortgage Brokerage Services. “But with higher prices today and tightened policies, homebuyers have to find a solution.”

Hong Kong has the least affordable market in the world, with the median home price climbing to 17 times household income, according to an annual study by consultancy Demographia. Homebuyers in the former British colony have taken on more debt as prices surged 13 percent to a record last year, driven by gains in smaller properties.

Lending Surge

The number of new mortgages approved during December surged 56 percent to 7,606 from a year earlier, according to monetary authority data, as low interest rates and record rents fuel demand. Mortgage rates have been falling since 2011, averaging 1.95 percent in January, according to mReferral data.

Nonbanks, whose lending isn’t regulated by the monetary authority, have been proliferating. There are about 1,352 such lenders in the city of 7.3 million people compared with 784 about four years ago.

Business has been brisk for Hong Kong Finance Group. Its mortgage portfolio expanded 53 percent to HK$501.9 million last year through September despite its high interest rates. The lender charges about 10 percent to 15 percent for new loans and as much as 20 percent for second mortgages, its chief executive officer Dickson Tse said in an interview.

“Money lenders have traditionally been focused on personal lending, instead of mortgage loans,” Tse said. But “over the past six years, Hong Kong’s mortgage measures have been giving us business opportunities.”

90% Mortgages

At mReferral, home loans for 80 percent to 90 percent of a property’s value rose to 15 percent of all mortgages, up from 9.6 percent in 2008. The mortgage broker is a joint venture between realtor Midland Holdings Ltd. and Cheung Kong Holdings Ltd., the developer controlled by the city’s richest man, Li Ka-shing.

The broker is offering 90 percent financing for the first 30 homebuyers at Cheung Kong’s newest project. The loans come with an interest rate of only 2.2 percent in the first year and increases incrementally to 3.75 percent.

Apartments at the La Lumiere, one of the most recent developments to go on sale, are about 430 square feet and start at HK$5.8 million, after a 15 percent discount. Winchesto Finance Co., which is owned by Cheung Kong, is also providing mortgages for La Lumiere of up to 80 percent of the property price.

Cheung Kong sold all 108 apartments it offered for sale at La Lumiere on Saturday, according to its website.

Developer Incentives

On a recent Sunday morning, Matthew Wong said developer financing appeals to him as he waited to look at a La Lumiere display flat. Tired of paying a big chunk of his income on rent -- HK$15,000 a month for a 420 square-foot apartment -- he and his partner are looking for their first home for HK$6 million or less.

“We would want to do the 90 percent loan plan if it makes sense,” said Wong, who is in his late twenties. Monthly mortgage payments ideally would be not much more than their rent, he said.

Loans from developers typically come with incentives, such as an interest-free period, said Ivy Wong, managing director at Centaline Mortgage Broker.

“It’s essentially a project discount,” Wong said. Developers have always offered financing, “but as policy measures build up, they’re becoming more popular.”

Broaden Base

The proportion of buyers using second mortgages from developers is usually less than 10 percent, limiting the builders’ risk, said Joyce Kwock, a property analyst at Credit Suisse Group AG in Hong Kong.

“They purely want to broaden their client base,” she said. “If you ask whether they want to target those who are barely scraping by to pay for their first homes? I don’t think developers want that either.”

The rising number of buyers resorting to nonbanks has attracted the attention of the HKMA, the de-facto central bank. It told banks to ensure that their loans to nonbanks that are used for housing comply with the latest home-loan rules, according to a March 2 circular.

“We don’t want to give people an impression that we are against what the government is doing,” said Tse of Hong Kong Finance Group. “We would also like to see a stable property market.”

Delinquencies Rise

While mortgage delinquencies are increasing, they remain low. They rose to 0.03 percent in the fourth quarter compared with 0.02 percent in the previous six three-month periods, according to monetary authority data. It takes borrowers on average 25.8 years to repay their mortgages, according to December figures, 11 months longer than a year ago.

For now, nonbank lenders don’t pose a significant risk because of their small market share. The amount of property-related loans by nonbank lenders is HK$8 billion to HK$9 billion, or less than 1 percent of the HK$900 billion mortgage market, Norman Chan, chief executive officer of the monetary authority, said on Feb. 27. That’s not material enough to affect the “evolution of the property market,” he said.

First Credit Finance Group Ltd. is among the nonbank lenders that’s grabbing more market share this year. The firm expects up to 30 percent more business in the next two to three months.

“The mortgage tightening measures caught buyers by surprise,” said Sin Kwok Lam, chairman of First Credit Finance. “Those who have been planning to buy an apartment without enough money after the new measures are coming to us.”