Shadow mortgage lending in Hong Kong

Property prices have been booming in Hong Kong over the past couple of years, and have yet to reflect any slowdown. While various governmental regulations have attempted to curb growth, a closer look at Hong Kong’s mortgage market reveals that shadow lenders are rapidly gaining ground. These mortgage lenders operate outside of financial regulations and have become the option of many buyers as more limits are placed by the Central Bank on traditional forms of financing.


Shadow lending describes private lending performed by institutions that are not tradition banks. These institutions can be financial intermediaries or other lenders and provide similar services as banks. These institutions do not necessarily create instability in the financial system, and can be greatly beneficial by offering financing to buyers in a time where restrictions on tradition banks are tight. However, these institutions lie outside the control of official regulatory institutions, thus their lending practices may be at greater risk if a financial downturn were to happen.


In most countries, the major of home loans are still made out by traditional banks, and in some countries shadow banking is illegal. In Hong Kong, shadow banking is legal as long as the interest rates these firms demand and receive for do not exceed 60% per year. For many in Hong Kong, shadow mortgage lenders are a great resource since government actions to curb housing prices such as raised interest rates and higher risk capital buffers have made traditional home loans are very hard to secure.


Many of the shadow lenders in Hong Kong are housing developers and property groups who hope to profit by loaning at high interest rates to buyers who are more than willing to pay. The interest rates offered by various firms range from 5-20%, compared to rates of 2-3% at traditional banks. Furthermore, these lenders are able to lend as much as 80 to 90% of the property price and more than 120% for those hoping to remodel their current home, compared to traditional banks like HSBC and Standard Chartered who can only lend up to 51% for mortgages.


Currently, shadow mortgages still remain a small part of the general mortgage market in Hong Kong, however, shadow banking has been growing around 40% a year, and will likely continue to grow as long as governmental regulations on traditional lenders remain tight. The number of shadow lenders in Hong Kong have doubled since five years ago, and data from the official companies registry show that more than 100 firms have applied for a lending licence at the end of May this year.


These shadow lenders are outside of banking regulations and are officially monitored by the Hong Kong police, but they remain closely tied to the financial industry. However, because they not strictly monitored by the industry, these lenders are exposed to much greater risks of defaults. This is made worse by the fact that many of the lenders have themselves financed their operations with loans from traditional banks, thus their instability can easily infiltrate into the general market. A representative from Sun Kung Kai, one of Hong Kong’s many shadow lenders, said that their lending “does not affect the company’s financial position as the loan exposure is very small and well-secured”. While the current level of mortgage defaults in the general market is very low and general economic conditions are good, this may not remain the case in the future.

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