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An overview of the household debt situation in Hong Kong(1) Benny Lui & Clara Liu December 2015 Household borrowing in Hong Kong has grown considerably since the 2008-09 Global Financial Crisis (GFC), subsequent to a period of household deleveraging after the Asian Financial Crisis in 1997-98 (Chart 1). This development is, however, not unique to Hong Kong. The successive large-scale quantitative easing programmes rolled out by major central banks after the GFC have driven interest rates to record lows. The nearly-zero borrowing cost amid the abundant global liquidity seemed to have led to visible rises in household indebtedness across the Asian region. This note attempts to examine the household debt situation in Hong Kong. 2. Assessing households’ indebtedness is important due to its potential implications on Hong Kong’s macro-economy, especially when the US is about to embark on an interest rate upcycle. Given Hong Kong’s linked exchange rate with the US dollar, US interest rate hikes would eventually translate into higher interest rates and hence borrowing costs in Hong Kong. This may thus have an effect on consumption, depending on the household debt situation. Chart 1: Hong Kong's household debt on the rise since the 2008-09 GFC 1,800 % Period end, HK$ million 1,600 70 Credit card advances (LHS) Other personal loans (LHS) Residential mortgage loans (LHS) Share of nominal GDP (RHS) 57 1,400 54 1,200 57 57 59 60 59 65 59 58 54 61 62 60 55 51 50 51 45 48 1,000 800 75 42 38 35 36 35 30 600 400 15 Note: (*) 2014 GDP figure was used when expressing the share of household debt at end-September 2015 in terms of GDP. Sources: Census and Statistics Department; Hong Kong Monetary Authority. 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 0 2015 09/2015* 200 0 3. By end-September 2015, Hong Kong’s total household debt amounted to HK$1,571 billion (or US$203 billion), equivalent to almost 70% of Hong Kong’s GDP in 2014. Residential mortgage loans formed the bulk of total household debt, at around 71%, while the rest were other personal loans and credit card advances, at 22% and 7% respectively (Chart 2). (1) In this note, household debt figures of Hong Kong and other debt- related statistics (such as debt-servicing ratio and loan-to-value ratio) are from the Hong Kong Monetary Authority (HKMA). GDP and unemployment rate figures of Hong Kong are from the Census and Statistics Department, HKSAR Government. For household debt figures of other economies, they are mostly from the Bank for International Settlements, unless otherwise specified. -1- 4. Total household debt at end-September 2015 was up by 11% over a year earlier, faster than the average 8% per annum growth in 2008-2014 and at a much more accelerated pace than the average 1% per annum growth in 2003-2007 when the household sector underwent a period of deleveraging (Chart 3). Chart 2: Residential mortage loans formed the bulk of Hong Kong's household debt 100 Chart 3: Hong Kong's household debt has risen much faster after the 2008-09 GFC Period end, % 30 Average annual rate of change, % 90 1993-1997 1998-2002 2003-2007 2008-2014 25 25 80 70 19 20 19 60 15 15 13 50 11 11 40 10 8 7 7 7 30 5 3 20 1 10 0 -1 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 09/2015 0 3 Credit card advances Residential mortgage loans -3 -5 Residential mortgage loans Other personal loans Source: Hong Kong Monetary Authority. Credit card advances Other personal Total loans household debt Source: Hong Kong Monetary Authority. 5. Given the significant share of residential mortgage loans in Hong Kong’s household debt, the increase in household debt since the GFC reflected, at least in part, the rise in housing prices between 2007 and 2014, which led to a visible increase in the amount of new residential mortgage loans (Chart 4)(2). Higher house prices could also induce a withdrawal of equity by households from the housing stock to release funds for other purposes, conceivably explaining in part the notable increase in lending by banks via other personal loans during this period. Chart 4: Notable increases in new residential mortage loans made by authorised institutions 350,000 HK$ million Gross residential mortgage loans made by authorised institutions 300,000 Average (2003-2007) 250,000 200,000 150,000 100,000 50,000 0 2003 2004 2005 2006 2007 2008 Source: Hong Kong Monetary Authority. 2009 2010 2011 2012 2013 2014 Jan2015 Sep 2015 (2) In the third quarter of 2015, there were around 411 000 owner-occupied households in Hong Kong with mortgages or loans. This comprised 33% of all owner-occupied households or 17% of all households in Hong Kong. Such number of households marked a cumulative decline of 22% from the fourth quarter of 2007. -2- 6. Nonetheless, in comparison to selected major Asian economies, Hong Kong’s household debt level in terms of GDP was not particularly high (70%)(3), versus Malaysia (88% at end-2014), Korea (84%), Taiwan (83%). The corresponding cumulative 7-year growth since the GFC was also not particularly distinct for Hong Kong (76%), when compared to Indonesia (271%), India (129%), Thailand (125%), Singapore (124%) and Malaysia (122%) (Chart 5). Chart 5: Rising household debt is generally a region-wide phenomenon 100 % % of GDP 400 End-2007 (LHS) 88 90 84 81 83 80 350 Cumulative increase from end-2007 (RHS) 72 70 352 End-2014 (LHS) 300 69 66 65 271 61 250 60 50 50 200 45 39 40 30 125 122 36 76 20 150 129 124 100 19 66 17 12 10 11 9 50 22 0 0 Malaysia Korea Taiwan Thailand Hong Kong Singapore China Indonesia India Sources: For Malaysia, CEIC; For Taiwan, Central Bank of the Republic of China (only crude estimates); For Hong Kong, Hong Kong Monetary Authority and Census and Statistics Department; For the rest of the economies, Bank for International Settlements. 7. The HKSAR Government is mindful of the risks associated with household indebtedness to the banking sector and the wider economy. Seven rounds of macro-prudential measures on property mortgage lending were implemented by the Hong Kong Monetary Authority (HKMA) since October 2009. A guideline on personal lending was also issued by the HKMA to authorised institutions to strengthen banks’ risk management and resilience. 8. These measures were effective so far. The average loan-to-value ratio of new mortgages was 51% in the third quarter of 2015, lower than the average of 64% in January to October 2009 before these measures were introduced. The debt-servicing ratio for new mortgages trended down successively to around 35% from over 40% before stricter limits were imposed on the debt-servicing ratio of mortgage applicants. The delinquency ratios for residential mortgage loans and credit card receivables stayed low at 0.03% and 0.24% respectively at end-September 2015 (Chart 6). The favourable job and income conditions of Hong Kong over the past few years or so should also help maintain the sustainability of household debt(4) (Chart 7). (3) Figure at end-September 2015, estimated using GDP in 2014. (4) Hong Kong’s labour market remained in a state of full employment, with the seasonally adjusted unemployment rate staying at a low level of 3.3% in August-October 2015. Labour incomes also sustained further growth. In the third quarter of 2015, the median monthly household income (excluding foreign domestic helpers) grew by 4% year-on-year in real terms. -3- Chart 6: Delinquency ratios for residential mortage loans and credit card receivables stayed low 2.0 Chart 7: Favourable job and income conditions crucial to maintaining the sustainability of household debt Period end, % 9 Residential mortgage loans 1.8 8 Credit card receivables 1.6 Year-on-year rate of change in real terms (%) Seasonally adjusted unemployment rate (LHS) % 6 Median household income (excluding foreign domestic helpers) (2Q moving average) (RHS) 7 1.4 8 4 6 2 1.2 5 1.0 0 4 0.8 -2 3 -4 -6 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 -8 2002 2015 2014 2013 2012 2011 2010 2009 2008 2007 0 2006 0.0 2005 1 2004 0.2 2003 2 2002 0.4 2003 0.6 AugOct Source: Census and Statistics Department. Source: Hong Kong Monetary Authority. 9. While significant efforts were put in mitigating systemic risks in the banking sector and Hong Kong’s financial system is sound and resilient, the Government would still need to remain vigilant about the highly uncertain external environment which could weigh on Hong Kong’s domestic economic performance and hence adversely affect the debt-servicing ability of the households. Also, with the US interest rate lift-off approaching and an expected widening of the divergence in monetary policy stances by major central banks, the local property market may face some downward pressures amid higher mortgage rates. This, coupled with an uncertain economic outlook, would in turn add further strains on households’ financial positions. The Government would therefore need to monitor the situation closely. Disclaimer: Views expressed in this article are those of the authors, and do not necessarily reflect the official position of the HKSAR Government. -4-