Fri, Jun 02, 2017 - Page 9 News List

Hong Kong property cooling set to fail as shadow lenders abound

Non-bank money lenders funded nearly 9 percent of mortgages for new apartments completed last year as the authorities shy away from extreme measures for fear of triggering a housing collapse

By Sumeet Chatterjee and Venus Wu  /  Reuters, HONG KONG

Illustration: Mountain People

Hong Kong’s latest attempt at cooling home prices in one of the world’s most expensive property markets is expected to send buyers scouring for loans in the unregulated shadow banking industry, spreading risk across the financial sector.

Home prices in Hong Kong, where a nano-apartment of less than 18.5m2 can cost as much as US$500,000, have surged more than 137 percent since the financial crisis in 2008, propelled by a supply shortage, low interest rates and big flows of money from Chinese investors.

They pose a huge challenge for the territory’s incoming chief executive, Carrie Lam (林鄭月娥).

The cost of accommodation in the territory, where home ownership is a distant dream for many, was among the triggers for mass protests in late 2014.

Authorities have failed to rein in prices, despite eight rounds of mortgage tightening by the Hong Kong Monetary Authority (HKMA) since 2009, on top of a series of tax and regulatory policies imposed by the government.

As those measures have curbed bank lending, finance companies have leapt into the gap.

They funded 8.7 percent of mortgages for new apartments completed last year, according to Centaline Property Agency.

For flats that have a completion date this year, the figure surges to 15.5 percent and is expected to rise further, it said.

Few expect the authorities to take extreme measures — such as imposing punitive taxes on Chinese buyers — for fear of triggering a collapse in prices in a real-estate industry that accounts for 10 percent of Hong Kong’s economic output.

Revenue from properties and related investments is estimated to have more than doubled in the fiscal year that ended March from the previous year, and is the second-biggest income generator for the government.

However, there is a danger that if the non-bank lenders overstretch they could also hurt confidence in the real-estate market.

In Canada, problems at the nation’s biggest non-bank lender, Home Capital Group, have helped to drive some buyers away from the hot Toronto residential market.

Controlling the flood of capital flowing across the border is a huge challenge for the Hong Kong government — cash-rich Chinese last year accounted for about 21 percent of buyers of new homes, according to Centaline.

“The major concern to the government is that lower land prices would greatly affect the government’s revenue, which has been very volatile as a large part of that is from land premiums,” Natixis economist Pascal Siu said.

The latest cooling steps announced 10 days ago — mainly making it costly for banks to make mortgage loans — were not aimed at targeting property prices, but at strengthening lenders’ risk management, a spokesperson for HKMA said.

“The focus of the regulators is to ensure that the bubble in the property market doesn’t dent the bank balance sheets,” an executive at a foreign bank with mortgage business in Hong Kong said. “They don’t want to rock the boat and make the property prices correct by 10 to 20 percent in a short span.”

Some of Hong Kong’s largest commercial banks in the mortgage loans market said they would raise interest rates following the measures, though the increases are modest.

The shift in lending into unregulated shadow banking channels is a concern, analysts and industry officials said.

“This is not healthy. When people can’t borrow from banks, they are forced to turn to finance companies. It is not healthy, because the HKMA cannot regulate finance companies,” Centaline research director Wong Leung-sing (黃良昇) said.

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