HKMA eases fears of rising household debt, largely home loans

Business | 30 Mar 2021 2:42 pm

Hong Kong's household debt as a percentage of gross domestic product has been on the rise, but the overall risk is manageable, said Edmond Lau, senior executive director at Hong Kong Monetary Authority.

The increase was mainly due to the economic contraction in Hong Kong since 2019, Lau wrote in a blog post today.

In 2020, the economy recorded the sharpest fall in history. Nominal GDP dropped by 5.4 percent. Even though the pace of household debt growth moderated to 5.5 percent in 2020 - compared with 12.8 percent in 2019 - the fall in GDP continued to push up the household debt ratio by almost 10 percentage points, Lau added.

"While we expect the household debt-to-GDP ratio to remain elevated in the short term due to cyclical and structural factors, we believe the overall risk of household debt in Hong Kong is manageable," Lau said.

It is quite normal to see sharp GDP falls driving up the household debt-to-GDP ratio. This has been observed not only in Hong Kong but also in the US, the UK, Japan and other economies, he said.

As most of the loans used for financing home purchases or investments are pledged with underlying assets, the associated credit risk to banks is lower, Lau said.

The majority of household debt in Hong Kong is made up of residential mortgage loans (68 percent) and loans for other private purposes (27 percent), while credit card advances account for only a small portion (5 percent).

"Compared to other places in Europe and the US, consumer credit (such as credit card advances) makes up only a small portion of household debt in Hong Kong. This type of lending is generally not secured by assets and may expose banks to greater credit risk when borrowers’ income declines during an economic downturn," he said.

HKMA estimates that total deposits of households are three times the total liabilities. Hong Kong has the highest household net worth-to-liabilities ratio, compared with other major economies, such as the UK, the US and even Japan, Lau said.

The HKMA will continue to ensure that banks approve loan applications prudently and closely monitor any changes in the quality of their loan portfolio, he added.


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