Hong Kong banks struggle to sell foreclosed homes even at 20% discount

Hong Kong – Packed inside a small office in Hong Kong’s financial district, about 20 people wait for a property auction to start.

The bidders – old women carrying grocery bags and middle-aged couples wearing T-shirts and sneakers – have come for a rare opportunity: the chance to buy a discounted home in a real estate market long known as one of the world’s most expensive.

Of the 24 properties up for sale, the majority are foreclosed homes. But in a display of the caution that has gripped Hong Kong’s market and is contributing to a price slump, the prospective buyers are wary.

Only one of the properties sells, with the rest failing to meet the minimum price or attracting no bids.

Auctions featuring seized homes have become more common in Hong Kong as the number of properties taken over by creditors rises. Foreclosed homes on sale in September increased 36 per cent from a year ago to 271 – the most since 2009, according to Hong Kong real estate agency Centaline Property Agency.

Other firms are also seeing a spike in distressed sales. The number of foreclosed properties handled by C S Auctioneers rose to almost 300 in September from about 100 at the beginning of 2023, according to Mr Alger Cheng, general manager of the firm’s auction department.

Banks are now open to price cuts in order to speed up sales, “knowing that the inventory of foreclosed homes will only increase given the down cycle”, Mr Cheng said. Such properties can be 20 per cent lower than the market price.

Enticed to buy

Hong Kong’s property market enjoyed a two-decade bull run that created a wealth gap and led to the city ranking as the least affordable housing market in the world.

But since 2021, there has been a price slump following an exodus of residents, severe Covid-19 restrictions, a weakening economy and interest rates that have more than doubled. Prices are now down 17 per cent from the 2021 peak, despite a brief recovery in the first half of this year, according to Centaline.

It was during the boom years, when prices were rising more than 10 per cent a year, that many buyers were enticed to enter the market. To own a property, people borrowed heavily from banks. New mortgage applications with more than an 80 per cent loan-to-value ratio made up 36 per cent of the total in 2022, up from 14 per cent in 2019, when Hong Kong relaxed the mortgage rules for first-home buyers, according to mReferral Mortgage Brokerage Services.

These borrowers are the most vulnerable group in the current high interest rate environment, which has seen monthly mortgage payments increase by 30 per cent from March 2022 based on a 30-year loan on a HK$5 million (S$877,000) property, data from mReferral shows.

The real estate market’s down cycle is also contributing to the pressure on struggling home owners by making it harder to quickly offload their assets at a price that can cover their loans, said Mr Dick Ip, assistant vice-president at Pan Asian Mortgage Advisory.

The number of used homes sold at a loss totalled 95 in September, the most this year, according to calculations by the Hong Kong Economic Times.

Vicious circle

The impact on the banking sector, though, has been minimal. The number of residential mortgage loans given by banks subject to foreclosure, receivership or similar legal actions stood at 282 at the end of June, representing an increase of 24 cases compared with end-2022, according to the Hong Kong Monetary Authority. The delinquency ratio was 0.07 per cent at the end of June, the authority said.

Still, house prices may fall another 5 per cent in the second half of 2023, which will create a vicious circle as borrowers are discouraged to repay loans when their debt becomes higher than the property value, said Mr Louis Chan, the head of Centaline’s residential division.

“The total number of foreclosed properties could increase to more than 1,000,” he said. BLOOMBERG