Hong Kong central bank concerned about high loan-to-value mortgages extended by developers

A potential buyer looking at a model of Riva, one of the latest developments by Sun Hung Kai Properties, in Hong Kong, on Feb 19, 2014.
A potential buyer looking at a model of Riva, one of the latest developments by Sun Hung Kai Properties, in Hong Kong, on Feb 19, 2014.PHOTO: REUTERS

HONG KONG (BLOOMBERG) - Hong Kong's de facto central bank expressed concern about the riskiness of mortgages with high loan-to-value ratios issued by developers, as some analysts are warning that property prices in the city are unsustainable.

"The accumulation of these high LTV mortgages may change the risk profiles of these property developers to which banks may have exposures," Raymond Chan, executive director for banking supervision at the Hong Kong Monetary Authority, said in an emailed response to queries from Bloomberg. The HKMA said it may ask banks to take additional steps to manage their exposure to the sector.

Hong Kong's property market, the world's least affordable, has been on a tear in recent months despite attempts by the city's leaders to cool prices in November by imposing additional taxes. That's prompted warnings from analysts including Cusson Leung at JPMorgan Chase & Co. who said that any external shocks could trigger tighter liquidity in the city's banking system and increase home buyers' borrowing costs.

"If the bubble bursts, buyers will not only lose their own money, they will also lose all of their parents' money," Leung said in an interview. Buyers have been using all of their assets as well as leveraging parents' existing homes as collateral to help make residential property deposits, he said.

Buyers have flocked to buy new homes as developers have enticed buyers with tax rebates and loan offers, often made through finance subsidiaries. Hong Kong developers such as Sun Hung Kai Properties and Cheung Kong Property Holdings are among those offering mortgages to homebuyers.

While bank loans are subject to limits imposed by the monetary authority, builder-arranged mortgages aren't covered by the same restrictions. Last year, Sun Hung Kai announced a mortgage offer worth as much as 120 per cent of a home's value at one of its projects. Regulations restrict traditional bank mortgages on properties costing less than HK$10 million (S$1.8 million) to 60 per cent of their value.

"The HKMA will continue to monitor the situation closely and consider whether there is a need for banks to strengthen their risk management in respect of their lending to property developers," the HKMA said.

The HKMA has been urging banks for more than a year to ensure finance companies that they do business with comply with regulatory mortgage limits. On March 2, 2015, it issued a letter to banks advising them not to provide loans to finance companies which offer high loan-to-value mortgages to property buyers.

The monetary authority said it does not have information on the overall size of loans by finance companies in Hong Kong, although it has been gathering information from banks on their exposure to the sector. The total amount of property-related loans provided by finance companies with relationships with the banks represents less than 1 per cent of the outstanding residential mortgages of the banking sector in Hong Kong, according to the HKMA.

"While the information provided by banks reflects that the total amount of mortgages provided by property developers remains small as compared to the total amount of outstanding RMLs provided by banks, the growth rate of these mortgages is increasing," the HKMA said.