The latest cooling steps announced by the Hong Kong Monetary Authority (“HKMA“) 10 days ago made it more costly for banks to make mortgage loans. They were not aimed at targeting property prices, but at strengthening banks’ risk management. In order words, it will be more difficult to get a mortgage loan from a bank, as if it wasn’t already difficult enough to get a secondary mortgage. The consequence? Rise of loan sharks.
Loan sharks are not subject to HKMA’s guidelines
If the buyer fails to pass the bank’s “stress test,” he’d need to find a loan shark (or subsidiary of property developer) to borrow beyond what is allowed under HKMA’s guidelines (e.g. 60% of purchase price for properties under HK$10m, capped at HK$5m). Loan sharks are not subject to HKMA’s guidelines, but the Money Lenders Ordinance, which provides that any interest above 48% is excessive, and above 60%, illegal.
The rise of loan sharks in the mortgage business
As HKMA’s measures have curbed bank lending, loan sharks in the name of “finance companies” have filled the gap. According to Centaline, they funded 8.7 percent of all mortgages for new apartments completed in 2016. For flats that have a completion date in 2017, the figure surges to 15.5 percent and is expected to rise further. Loan sharks will require little or no credit checks. Their job is to help developers push new properties.
One in five buyer of a new property is a mainlander
Ironically, one class of buyers especially don’t require any mortgage loans at all. According to Centaline, cash-rich Chinese mainland buyers accounted for about 21 percent of those buying new homes last year. This means that 1 in 5 new properties is bought by a mainlander who don’t require a loan from a local bank. The Government had done little to control the flood of capital flowing from across the border.
When people can’t borrow the bank, they go to loan sharks in the guise of “finance companies.” For property developers, this is win-win. The “finance companies” which are subsidiaries of the developers will lend whatever the buyer needs to buy new stock. When the buyer defaults in repayment, the “finance company” forecloses the property and re-sells it for even higher value, essentially flipping it for a profit. In other words, the developer not only sells the flat, it retakes it and sell it again for greater profits, and repeat.