Household debt is nearing a historic high, making any sudden economic downturn or property market crash likely to bring devastating consequences.
That stark warning was given to lawmakers yesterday by Hong Kong Monetary Authority chief executive Norman Chan Tak-lam.
He revealed that in the fourth quarter of last year, Hong Kong's total household debt - an aggregate of mortgage and personal obligations such as credit card bills - reached 59 percent of the SAR's gross domestic product.
That was just shy of the record high of 60 percent in 2002, when the economy suffered the worst recession in decades as home prices plummeted.
"Mortgage debt has piled up as home prices have gone up," Chan said. "During an economic downturn, household incomes would shrink and people would have more difficulty meeting and repaying their debts."
He reminded homebuyers to carefully consider their ability to meet their obligations, especially as interest rates could rise in the future.
"As the US interest rates are now tied to unemployment and inflation, it remains a big uncertainty as to when it will raise interest rates," he said.
The amount of home loans - which accounted for three quarters of household debt as at the end of last year - rose almost 40 percent over the past decade to HK$889 billion, according to HKMA data.
Total credit card debts and home loans jumped 1.4 times to HK$340 billion.
Chan warned that the overheated property market remains the greatest risk to the financial stability of Hong Kong, particularly as home prices are out of reach of many people.
He reiterated that the HKMA may roll out further curbs on mortgages when necessary, but he refused to be specific as to what measures will be imposed or when.
Economist Kwan Cheuk-chiu said: "Due to the super low interest rate environment, people are encouraged to take out loans to pay mortgages and tax."
Kwan added that mortgage affordability - average household repayment as a percentage of its income - and banks' mortgage lending as a percentage of total loans are two better indicators of banking stability.
But he believes the HKMA has done "a good job" of containing risks in the banking system.
But Terence Chong Tai-leung, an economics professor at Chinese University, said the current debt level cannot be compared with that of a decade ago because of the difference in interest rates.
"Even if it goes above 60 percent it doesn't mean there will be a huge problem," he said. "Loans are more affordable than in 1997."
He estimates it could take at least two years for US jobless rates to decline to the 6.5 percent target.
Meanwhile, Chan said he is satisfied with the 8.8 percent return of the Exchange Fund, but he stressed that it is not a sovereign wealth fund but one that protects the linked exchange system.
He rejected calls for the fund to be used to help the government buy back MTR Corp (0066) and the Link Reit (0823).