It was reported last week that potential problems facing the local housing market emanate from the aggressive mortgage financing being offered by certain developers to home buyers to bolster sales.
The mortgage deals offered by developers are much looser compared to those of banks and may not pass mortgage stress tests.
Mortgage financing offered by developers risk becoming problem loans and the risk is much higher than average mortgage loans. There were plans earlier to allow developers to offer higher amounts to help home buyers who fail to secure loans from banks.
Taking a HK$8.48 million flat as an example, studies show that the total interest on a developer's mortgage loan for the flat will amount to HK$6.67 million if it is paid over 25 years. Compared with bank financing, the home buyer will pay more than HK$5 million more if he or she uses a developer's financing.
During the first three years, the amortization of a developer's mortgage loan, extended through a subsidiary finance firm, is only HK$33,000 a month. But after 22 years, the amortization will balloon to HK$46,000 a month, twice that of the amortization of a bank loan. This has not yet taken into account possible increases in local interest rates.
A real estate agency earlier estimated that the number of new apartments completed in 2018 and mortgaged by finance companies will reach 491 and valued at 5.73 billion yuan (HK$6.73 billion). They represent 14.3 percent and 24.1 percent, respectively, of the total for 2018.
While the number does not look large, the estate agency's report estimated that there would only be 873 cases, worth 5.24 billion yuan, in which mortgage loans are to be secured from HSBC next year
That there is an increasing reliance on alternative funding sources to buy flats in the local market is definitely a sign that the housing bubble may be about to burst.
This is especially so when finance companies charge interest rates much higher than those of banks and yet, lots of high-cost loans are used to buy up flats in the local market. This means the quality of home buyers is declining. When interest rates go up, the chance of loan defaults among poor-quality home buyers will be very high.
The local housing market can be likened to a ticking time bomb since the proportion of high-risk mortgage loans has already reached a quarter of the total.
The domino effect of a bubble burst in the local housing market will be unimaginable.
The situation in Hong Kong is already worrisome, but that in the mainland could be even worse, and we can talk about it next week.
Andrew Wong Wai-hong is an independent commentator.