Banks are being forced to reduce prices on foreclosed properties to recoup their loans, as buyers in Hong Kong become increasingly cautious about the economic outlook and a deeper market correction.
About one-third of 98 foreclosed properties on the market have had their prices trimmed in June, according to the latest list creditors give agents, up from about a quarter in April, according to Century 21 Surveyors. The average price reduction was 6 per cent.
“This is the latest trend, there is some momentum to it because of the weakening economic conditions,” said Henry Choi, a director at Century 21 Surveyors, which conducts property auctions. “Buyers are getting very selective and cautious” even in already distressed assets, he added.
Hong Kong’s economy shrank by a record 8.9 per cent last quarter while unemployment reached the highest in 15 years, slammed by the coronavirus pandemic and the lingering impact of anti-government protests last year. A controversial national security law is also roiling the market as China speeds its implementation.
The number of foreclosed properties in Hong Kong could reach the highest level since the global financial crisis by early next year, as owners struggle to repay mortgages, Choi said last week.
While corporate insolvency remains relatively low historically, more local establishments expected the business situation to worsen this year, with pessimism at multi-year high, according to official quarterly surveys.
At the same time, Hongkongers have filed 3,611 cases of personal bankruptcy in the first five months this year, the fastest pace since 2016, according to government statistics.
One foreclosed 749 sq ft flat at Grand Promenade in Shau Kei Wan on Hong Kong Island changed hands at HK$16.88 million, 3.1 per cent lower than asking price in late April, according to Centaline Property Agency.
One foreclosed flat, measuring 468 sq ft at Cullinan West in western Kowloon, changed hands at HK$11.3 million in early May, about 27 per cent lower than its previous purchase price at HK$15.54 million in 2018, according to agents.
Creditors typically adjust their asking prices every three months to take into account changing consumer and economic sentiment, Choi added. It was easier to attract buyers for foreclosed properties at auctions until social unrest upended the market, he added.
Still, the level of delinquency in the Hong Kong banking system is negligible in respect to HK$1.46 trillion of outstanding loans to the property sector, according to data published by the Hong Kong Monetary Authority.
The amount of loans past due by three months amounted to 0.03 per cent as of April this year, compared to 0.02 per cent a year ago.
Cookie Wong, Ricacorp Mortgage Agency’s managing director, said banks will adjust prices for foreclosed properties according to the gap between mortgage loans and the underlying value of assets, known as loan-to-value ratio.
Bank interest rates are usually much lower, at just about 2 per cent, but big-ticket properties cannot get mortgages of a large loan-to-value ratio, she added. It is also more difficult to get bank mortgages for old or poor quality properties.
“The outstanding mortgages are definitely not at 100 per cent loan-to-value ratio, maybe around 60 to 80 per cent,” she said. “Then they have some headroom to adjust” depending on their cash flow requirements or reading of the future market direction, she said.
Otherwise, if creditors cannot recoup loans or the number of foreclosures suddenly surges, “it definitely dampens the sentiment” and “definitely a negative signal to the market,” Wong added.
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