The hit to Hong Kong residential prices over the past few years won't knock on to banks. History shows sharp falls in economic growth or jumps in unemployment rates are bigger factors for credit performance on Hong Kong residential mortgage loans. We expect the city's banks will face minor but manageable pressure on such portfolios in the next two years.
What's Happening
Hong Kong's home prices fell nearly 30% from their historical peak in 2021, amid a supply overhang and high interest rates. In 2024, home prices declined by about 7%. We expect prices to remain flattish in 2025 as a supply glut and competitive pricing strategies persist. This is despite our view that transaction volume and investment demand will rise amid a gradual decline in lending rates and the government's latest market-boosting policy measures.
Why It Matters
Sluggish home prices alone are unlikely to have a material impact on the quality of the portfolio. This is despite the fact residential mortgage loans account for about 20% of Hong Kong banks' total loan book. The banks have sustained adequate underwriting standards and strong risk control on residential mortgage loans under the government's macroprudential measures, which were adjusted according to property market conditions. The Hong Kong Monetary Authority introduced an interest rate stress test for residential mortgage borrowers in 2010. This has improved the banking sector's resilience to sharp interest rate hikes, in our view.
We estimate the average loan-to-value (LTV) of mortgages at banks to be 55%-60%. More importantly, a stable unemployment rate and household income growth have supported the ability of borrowers to service their loans over the past decade (excluding the pandemic years of 2020-2023). These factors contributed to the very low delinquency ratio (90 days past due) of residential mortgage loans of 0.11% at the end of November 2024.
What Comes Next
Economic growth and unemployment rates are likely the major drivers behind the asset quality of residential mortgage loans. This is because a potential shrinkage in household income could have direct negative impact on borrowers' capacity to service debt rather than the correction in property prices. We expect Hong Kong's GDP growth to moderate to 2.3% in 2025 and stay at that level in the next two years, after an estimated 2.7% gain in 2024. The unemployment rate should also remain rather stable at about 3.0% in 2025 and inch down over the next two years. Under our base case, we do not expect significant pressure on the credit quality of residential mortgages.
Background In Brief
Hong Kong banks have a record of strong risk management on residential mortgage loans over the past several decades. Hong Kong home prices fell 65% between the 1997 Asian financial crisis and the 2003 SARS outbreak. During this time, household incomes came under pressure as the unemployment rate jumped to about 8.5%, and deflation took hold. And the ratio of residential mortgage loans that were 90 days past due rose to only about 1.5% of gross loans. We attributed this exceptional performance in residential mortgage loans to active management by regulator and banks, full recourse terms in mortgage loan agreements, and disciplined household saving.
Chart 1
Chart 2
Editor: Lex Hall
Related Research
- Economic Outlook Asia-Pacific Q1 2025: U.S. Trade Shift Blurs The Horizon, Nov. 25, 2024
- Hong Kong Residential Property In 2025: Volume Will Rise, Not Price, Nov. 11, 2024
- Hong Kong's Commercial Real Estate Downturn Is Spreading To Banks, Oct. 31, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Emily Yi, Hong Kong + 852 2532 8091; emily.yi@spglobal.com |
| Secondary Contacts: | Phyllis Liu, CFA, FRM, Hong Kong +852 2532 8036; phyllis.liu@spglobal.com |
| Ryan Tsang, CFA, Hong Kong + 852 2533 3532; ryan.tsang@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.