In the past three years, Hong Kong has experienced a wave of emigration and foreign capital withdrawals, which have dealt a significant blow to the Hong Kong economy from various angles. The latest sign of this impact is reflected in the mortgage market. Major banks in Hong Kong, including HSBC, have recently canceled a large-scale cash rebate on most mortgage products, keeping only a few mortgage loan types with cash rebates. While the surface reason given is the low profit margins in the mortgage business, the underlying cause reflects a deeper issue – the shrinking overall size of Hong Kong’s economy, which industry insiders believe is a result of the weakening economic conditions leading to reduced demand for commercial loans.
The total amount of bank loans in Hong Kong has decreased by more than 7% compared to 2019, leading to a reduction in loan portfolios. Banks are no longer aggressively offering cash rebates to attract mortgage clients to hedge risks. The cancellation of cash rebates by banks signifies a larger message beyond just the event itself. Coupled with the latest data showing a record high vacancy rate in high-quality office spaces in Hong Kong, the financial and real estate sectors are both in crisis. Stephen Roach, who previously expressed the view that “Hong Kong is over,” stated on social media that Hong Kong is facing “China Shocks” politically and economically.
Based on market intelligence, HSBC in Hong Kong has canceled cash rebates for new mortgages and property development loans, except for token rebates on certain green mortgages. Top banks implemented this new policy in mid-April, drastically reducing or eliminating cash rebates on conventional property loans, keeping only rebates for mortgage insurance and high percentage mortgage loans. Although major banks have taken the lead in this new policy, experts anticipate that smaller banks will also follow suit.
The direct cause for the removal of cash rebates on mortgage loans by banks is the extremely low profitability in the mortgage business. According to Cao Deming, Vice President of a mortgage brokerage, the market anticipates that potential Fed rate cuts may be delayed, keeping interbank lending rates high, exceeding the usual new mortgage rates of 4.125%. Banks are cutting cash rebates gradually based on costs, margins, risk management, and other factors. The profitability of mortgage loans has decreased to almost negligible levels.
However, low profitability alone doesn’t necessarily prompt a shift in banks’ policies towards mortgage lending. Mortgage lending has always been a low-margin business, but even with prolonged ultra-low interest rates pressuring lending rates in Hong Kong, banks have historically embraced rebates to attract mortgage clients due to the high profits generated by large-scale commercial loans, necessitating a significant volume of low-risk mortgage loans to mitigate overall lending risks.
The fundamental reason behind banks eliminating cash rebates on mortgage loans is the diminished loan size and quality resulting from the economic contraction in Hong Kong. As per the Hong Kong Monetary Authority’s Risk-Weighted Asset Rules, banks had previously used mortgages to hedge risks related to specific industries, economic segments, or similar-risk borrower groups.
Data from the Hong Kong Monetary Authority’s Financial Data Monthly Report shows that as of March this year, the total amount of loans and advances from all licensed institutions in Hong Kong amounted to HKD 10.09 trillion, down by 7.35% from 2019. A survey conducted by the Authority revealed that around 70% of respondents anticipated stable loan demand in the next three months, indicating continued weak credit demand.
On the other hand, residential mortgage loans have increased to HKD 1.85 trillion, up by 26.53% from 2019, with residential mortgages accounting for a higher proportion of total loans. Despite the overall contraction in banking loan operations, mortgage business continues to expand. However, the delinquency rate for mortgages has risen from 0.03% in 2019 to 0.09% in March this year, with 32,073 negative equity mortgage loans, hitting a 20-year high.
Financial Times reported on the “grim slump in Hong Kong real estate,” noting the increasing unease among the city’s major property developers as property prices decline. It highlighted that The Henderson, a property under Henderson Land Development, currently has a rental rate of only 60%, falling short of the original target of 80%. The report also mentioned that the second phase of the construction of the Cheung Kong Center had a rental rate of only 10% as of March this year.
The downturn in the property market is attributed to well-documented reasons. The Wall Street Journal reported that many companies, including its Asian offices, are shifting their focus from Hong Kong to Singapore, as evidenced by a decline in foreign regional headquarters in Hong Kong by 11.17% from 2020 to 2023. In contrast, local offices serving Hong Kong increased by 6.94%, totaling 9,039 establishments in 2023. Foreign entities have downgraded their headquarters status in Hong Kong to regional offices.
This shift has impacted the demand for real estate in Hong Kong, as leading AI investments no longer consider Hong Kong a primary choice. Amazon Web Services announced an USD 8.5 billion investment plan in Singapore for AI cloud computing until 2028, diverting from potential investments in Hong Kong. Similarly, Microsoft CEO Satya Nadella disclosed a USD 3.9 billion investment in AI in Malaysia and Indonesia, with plans to establish a data center in Thailand. Tech giants like Apple, Nvidia, and others have also chosen to invest heavily in AI cloud computing infrastructure outside of Hong Kong.
These various factors have collectively dampened the demand for real estate in Hong Kong. Professor Stephen Roach, who previously highlighted the “Hong Kong is over” sentiment, further emphasized that Hong Kong’s property market is more susceptible to fluctuations than other major markets, as the city not only fails to escape post-pandemic troubles but is also affected by the “China Shock” politically and economically.