HONG KONG (Reuters) - Spooked by the prospect of rising interest rates, a slowing economy and a mounting supply of new apartments, Hong Kong developers are going all out to woo buyers, offering bigger loans, longer repayment periods and even discounts for school tuition.
The aggressive sales pitches - at a time when borrowing costs are set to surge and property prices are likely to fall by 10-15 percent - could push up delinquencies and weigh on the financial sector, bankers and analysts warn.
Close to 900 new apartments were put up for sale in the past weekend, the most for more than five years.
Hong Kong is one of the most expensive property markets in the world, where a one-bedroom 650 square foot flat on the main island costs an average of $1.48 million.
Low interest rates, limited supply and big flows of capital from Chinese buyers resulted in housing prices rising by 165 percent over a decade, prompting repeated warnings from authorities about asset bubble risks.
Hong Kong private home prices rose to another record in July, extending a 28-month run.
In a sign of cooling market, however, August prices in the secondary market fell 0.3 percent, realtor Ricacorp Properties said. Another realtor, Centaline, expects total transaction volumes in September to drop to the lowest since July 2017.
Rising interest rates could be the needle to prick any bubble.
Banks are likely to raise the benchmark prime interest rate for the first time since 2006 this week following another expected rate rise by the U.S. Federal Reserve.
“Mortgage rates can only go up and quite quickly,” said Alicia Garcia-Herrero, Natixis’ chief Asia Pacific economist.
“The rise in interest rates would have an impact on the lower end of the market, where households have resorted to loans from non-banking firms. In other words, it will affect the lower middle class who have dared to buy but not the mass affluent so much.”
Hong Kong banking sources said borrowing costs for home buyers would be gradually raised over the next six to 12 months, and could touch 3 percent from an average of roughly 2.25 percent now.
Adding to the headwinds is expectation economic growth will slow as the trade war between the United States and China weighs. Nomura for one expects Hong Kong to grow 2.3 percent in 2019, from an estimated 4 percent this year.
Hoping to mitigate risks to the financial system from runaway prices, Hong Kong’s de-facto central bank has been tightening mortgage lending criteria. Last year, it lowered the maximum amount banks can lend on a property, or loan-to-value (LTV) ratio, to about 50 percent from 60 percent a couple of years ago.
The tougher down-payment requirements have channeled a part of the mortgage business to the non-banking sector, including the financing units of cash-rich property developers that don’t come under the central bank’s regulatory supervision.
Flush with cash from their main property business, some of these developers are now vying with each other for buyers.
Sun Hung Kai Properties, Hong Kong’s most valuable developer, for example, is offering 100 percent financing for its Park YOHO Napoli apartment in the New Territories district, provided the mortgage is secured by another fully-paid property.
Sun Hung Kai’s deputy managing director Victor Lui said 100 percent financing was aimed at making it easier for buyers to switch properties. “From our past experience, borrowers of these loans will repay the mortgage within one year of purchase.”
China Vanke last weekend launched the sale of its Le Pont project in New Territories with LTV of as much as 80 percent, according to its sales documents.
To further sweeten the offer, the developer is also offering 20 percent discount on tuition fee for a buyer’s child for one year in a neighborhood pre-school. Also on offer are Adidas cash coupons worth HK$2,000 ($255) for each unit purchased.
Quincy Chow, vice-president of operations department for sales and marketing at Vanke said the company’s “products and different financial benefits” had been received well, and had resulted in increased number of prospective buyer visits.
Others are extending the interest-free repayment period to three years, after which the buyer will have to pay sharply higher than the prevailing mortgage market interest rates, according to sales documents and property agents.
Mortgage loans provided by the units of developers accounted for 17.4 percent of the total pre-sale home market in the second quarter of this year, said Sharmaine Lau, chief vice-president at mReferral Mortgage Brokerage Services.
The ratio, which fluctuates a lot, declined to 9.6 percent as of end-August.
“Financing companies lend a higher (LTV) ratio but the rates are also higher than banks,” she said.
Some property agents said the recent implementation of a vacancy tax, which makes developers pay for completed but unsold units, has also resulted in renewed push by developers to lure buyers with attractive offers.
Bankers, however, warn the generous funding options could create more risks.
“It’s not sustainable, especially when you are staring at an increase in borrowing costs and an economic slowdown,” said a senior retail banking executive at a foreign bank, declining to be named as he was not authorized to speak to the media.
For now, however, prospective buyers are not willing to give up on their obsession with owning property in Hong Kong.
“This is just the right time, given these incentives being offered,” said David, a 42-year-old finance professional who declined to give his second name.
“Even if the interest rates goes up by a few basis points, it won’t impact much as the rental yields are still high and Hong Kong will always have a supply shortage,” he said at an apartment sale in Kowloon last month.
Reporting by Sumeet Chatterjee and Clare Jim. Editing by Lincoln Feast.