Declining property prices are not expected to harm Hong Kong-based banks' exposure to one of the world's most expensive real estate markets, thanks to safeguards built into their mortgage lending.
The banks have seen their aggregate asset quality worsen since 2020 and have stepped up provisioning, S&P Global Market Intelligence data shows. The ratio of problem loans to gross customer loans at the lenders rose to 1.56% in 2023 from 0.53% at the end of 2019, while the ratio of loan loss reserves to gross loans has been increasing since 2018, according to Market Intelligence data. The banks' aggregate loan loss provisions also jumped in 2022 and 2023 from 2021.
Hong Kong has been looking to boost its economy and stem a decline in property prices since mid-2021, when the COVID-19 pandemic hurt sentiment. The Hong Kong Monetary Authority (HKMA) suspended its interest-rate stress testing requirement for property mortgage lending by banks in February. The regulator also eased its cap on the loan-to-value ratio — a lending risk assessment measure that banks examine before approving a mortgage — resulting in a lower requirement on down payments for potential homebuyers.
"There is still a firewall through the mortgage payment-to-income ratio in insulating the risk to asset quality," said Gary Ng, senior economist at Natixis Corporate & Investment Banking. "Despite the intensified negative equity trend, households will likely keep their [home] units," Ng said, adding that households are currently less leveraged than in the 1998–2003 crisis in the local real estate market.
Negative equity, when the market value of a real estate asset falls below the mortgage amount, was more widespread during the 1998–2003 property downturn in Hong Kong, Ng said.
Hong Kong has long been one of the most expensive real estate markets in the world, fueled by a low interest rate environment. The HKMA introduced stress tests in 2010 to make sure that homebuyers would still spend no more than a certain percentage of their household income on mortgage payments even if the interest rate rose by 200 basis points. The city's government imposed additional stamp duties for nonlocal buyers and those who bought or sold property frequently. The government dropped that requirement in the 2024 budget presented in February.
The Centa-City Leading Index rose nearly 5x to 191.34 in August 2021 from its 2003 trough. The local property price benchmark compiled by Centaline Group has since declined 23% to 147.08 in early April 2024.
By the fourth quarter of 2023, residential purchase loans by private individuals in the territory steadied at HK$1.98 trillion after climbing for at least 20 quarters in a row, according to HKMA data.
As many as 2,375 residential units changed hands in February, according to the latest Hong Kong Land Registry data, recovering slightly from a multiyear low of 2,123 units set in October 2023.
"Given the stockpiled private unit supply and the slow rate cuts, the measure will support home transactions more than prices, meaning another round of property bubble is not likely," Ng said, adding that restrictions can always be reintroduced if needed.
The HKMA "suitably adjusted the countercyclical macroprudential measures for property mortgage loans and other related supervisory requirements on property loans, after detailed analyses and having considered that there was room to make this adjustment, while continuing to maintain banking stability and ensuring the proper risk management of property lending by banks," according to the regulator's half-yearly monetary and financial report published in March 2024.
The interest rate risk exposure of banks in Hong Kong remains at a relatively low level, the HKMA said, adding that banks should be "well positioned to withstand" a hypothetical shock of an across-the-board 200-basis-point increase in Hong Kong dollar and US dollar interest rates.
"For Hong Kong banks, significant downside on asset quality likely stays limited given adequate underwriting standards and controlled risk appetite," said Shinoy Varghese, associate director for financial institutions ratings at S&P Global Ratings, at an April 24 webinar.
Major Hong Kong banks' exposures to the residential property sector are also mainly collateralized with an average loan-to-value ratio of 50%, providing some buffer against any significant drop in property values, Varghese said, adding that the risk from the recent relaxation of macroprudential measures remains negligible.
"With interest rates [in most global economies] at their peaks, there is no immediate impact on Hong Kong banks' mortgage quality from the recent relaxation of macroprudential measures, including the suspension of stress tests," said Bruce Pang, head of research and chief economist of Greater China at Jones Lang LaSalle.
The potential impact will also likely be limited even assuming a downside of 5% in the local housing price in 2024, Pang said, given the much stronger positions that local banks currently have compared with 1997–1998 and after years of stringent prudential measures implemented by the authorities.
Despite the slight increase in the classified loan ratio,
BOC Hong Kong (Holdings) Ltd., one of the top three mortgage market share holders in Hong Kong, declined an interview request by Market Intelligence, while Standard Chartered PLC and The Hongkong and Shanghai Banking Corp. Ltd. did not reply to such requests.