Hong Kong banks continue to tighten their liquidity, with news of call loans and difficulties in mortgage applications becoming increasingly common. At the beginning of this month, Legislative Council member Lin Kin Fung, together with several real estate agents, voiced concerns to the Monetary Authority, stating that banks tightening mortgages could lead Hong Kong’s economy into a vicious cycle. Meanwhile, one of the leading mortgage lenders in Hong Kong, Hang Seng Bank (Stock Code: 011), reported a sharp increase in non-performing loans in their mid-term performance, as property prices – the primary collateral for local borrowing – continued to decline. Financial commentator Yim Po Kong even described the situation as dire, with investors still grappling with high debt burdens that cannot be resolved overnight.
Lin Kin Fung expressed to the Monetary Authority that the current tightening of property and commercial mortgage loans by banks could lead to a vicious cycle in Hong Kong’s operations. He also cited property buyers mentioning that the banks’ mortgage approval process is taking too long, with some not processed even at the time of signing formal contracts, forcing some buyers to cancel transactions. He believed that banks should make adjustments and urged the Monetary Authority to reflect the situation to the banks.
In fact, at the end of last year, local media Ming Pao quoted sources as saying that the Deputy Chief of the Monetary Authority, Ruan Guoheng, anticipated that the non-performing loan ratio would rise to around 2% by the end of last year, urging the industry to “make full provisions” for non-performing loans in 2023. However, Hang Seng Bank (Stock Code: 011) announced in late July that its mid-term performance showed the non-performing loan ratio had risen to 5.32% (see chart), a significant increase from 0.22% before the pandemic in 2019. The performance explained that the high interest environment had put pressure on some of its Hong Kong commercial real estate clients’ cash flows, but also noted that “most loans are provided with collateral,” with approximately two-thirds of their Hong Kong commercial real estate loan portfolio having collateral.
Another local mortgage leader, Bank of China Hong Kong (Stock Code: 2388), also saw its non-performing loan ratio rise from 1.51% in 2019 to 2.86% by the end of December 2023. The Monetary Authority’s quarterly report on specific category loan ratios, classified as “substandard,” “doubtful,” or “loss,” showed a gradual increase from 0.57% in 2019 to 1.79% by the end of the first quarter of 2024.
Yim Po Kong, former head of the Cable News Financial Channel, pointed out in an interview with the press that the specific category loan ratio, namely the non-performing loan ratio, had risen from 1.5% at the end of last year to 1.79%. This ratio is the highest in twenty years, and banks believe this bad debt will continue to deteriorate. Coupled with the fact that even Hang Seng Bank, known for its prudent operations, saw its non-performing loan ratio climb to 5.3%, the situation is dire. He cited the worst time during the 1998 financial crisis when the non-performing loan ratio was 10%, emphasizing that for banks to stop the erosion, they must reduce those non-performing loans and start recovery efforts.
However, the downward trend in commercial property prices, used as collateral, has not halted. According to figures from the Rating and Valuation Department, retail, office, and residential property price indices have been declining steadily since 2019 (see chart), with offices being the hardest hit recently, declining by 17.66% year-on-year in the second quarter of 2024, to 390 points, returning prices to 2012 levels. Retail and residential properties also saw nearly 13% declines each.
The decrease in collateral prices directly affects borrowers’ repayment capacity. In recent years, a classic example in Hong Kong’s economy is the Tang Cheng Po family, who, besides continuously selling family assets, faced property devaluations that led to no buyers willing to take over the properties. The latest news indicated that two properties owned by the Tang Cheng Po family, including the entire Lau Chit Centre in Kwun Tong and multiple ground-floor units at 60-62 Laichik House on Hoi Yuen Road, acquired for HK$1.08 billion in 2014, were unsold at a peak of HK$2.88 billion in 2017 during the property boom. The property market then weakened, and by March 2022, the asking price had plummeted to HK$1.4 billion, further dropping to HK$1.12 billion in April 2023, and this year, falling again to HK$1.1 billion with no takers, eventually leading the properties to be taken over by the bank.
Large commercial properties are struggling to find buyers, and even residential properties have seen rare cases of construction stoppages. New World Development (Stock Code: 016, hereinafter referred to as “New World”) issued a statement indicating that due to market changes, adjustments to the design of the Tuen Mun Sau Kwai Homestead project, jointly developed with Hip Shing Hong (Stock Code: 896), would be made, necessitating changes in site progress and processes, without ruling out a temporary halt in some works. Cynthia Yeung Ming-yee, Senior Executive Director of Research at Centaline Property, pointed out that as of June 2024, there were a total of 230 unsold residential units, an increase of 23 units, or 11.1%, compared to the previous year. The Monetary Authority announced in the second quarter that the negative equity possessions stood at 30,288 cases, slightly declining from the first quarter but still at a high level exceeding 30,000 cases.
Henley & Partners, a multinational investment immigration consulting company, released the 2024 Wealth Migration Report, showing that China is the largest net emigration country for millionaires (in US dollars), with an estimated 15,200 individuals leaving. According to RFI, it is projected that 200 wealthy individuals will migrate to Hong Kong this year. When combined with China, the total net outflow of millionaires amounts to 15,000, while concurrently, Singapore welcomed 3,500 wealthy individuals. These numbers may reflect the market’s acceptance capacity.
The market is generally hopeful that a rate cut by the Federal Reserve could support the property market. Marcus Lam, Deputy General Manager of New World, mentioned that the current market rates are believed to have peaked, estimating that the US rate cut cycle is imminent. As mainland China and the Hong Kong economy continue to recover, the property market performance for the next quarter is expected to return to the environment with rising prices and sales volume seen at the beginning of the year. Jonathan Woo Tin-hoi, Chairman of CK Hutchison (Stock Code: 004), also stated that if there is a rate cut by the Federal Reserve in September, the future transactions of Hong Kong properties will increase in the next 6 to 12 months, and prices will stabilize.
However, Yim Po Kong expressed to the press his belief that there is a high likelihood of a rate cut by the Federal Reserve, but the magnitude might not be significant, estimating a quarter-point cut each time. He also pointed out that the US raised their rates by 5.25% over the past two years, while Hong Kong’s rate increase (hike in the minimum lending rate) was only 0.875%, resulting in a difference of over 4 points. He remains skeptical about the extent to which Hong Kong will follow the US in cutting rates and stated that seasoned investors still face high debt problems, which cannot be resolved immediately.