In my year-ending Industry Insights Report, the outlook for the Hong Kong consumer credit economy was optimistic, with low risk existing alongside pleasing growth. The first quarter of 2018 supported this, but then figures released by the Bank of International Settlements showed another rise in household debt as a percentage of GDP. Should that new data put a damper on my positive diagnosis?
I would say, not yet.
True, at 70.6% of our GDP, the household debt ratio is now higher than it’s been in the 30 years of data to which I have access. True, it’s higher than all but Korea when we look to our Asian counterparts; and true, increasing levels of household debt today tend to slow GDP growth in the future... but, there are a few factors at play that I feel lessen the immediate risk.
First and most simply, while 70.6% of GDP is high for Asia, it’s on par with other advanced economies around the world. Hong Kong’s household debt ratios are lower than those in the U.S. and UK, where they’re 78.7% and 86.7% respectively, and significantly lower than those ratios in markets like Canada (100.2%), Denmark (115.6%), and the IBS’s table-topping Switzerland (127.8%).
So, Hong Kong’s household debt to GDP is high but not unreasonable. Of course, as well as the size of household debt, it’s worth considering that debt’s composition. Mortgages make up about 80% of the balances owed by Hong Kong households, compared to slightly under 70% of the debt owed by American and British households.
In other words, Hong Kong has a smaller percentage of its GDP in household debt and a smaller percentage of that debt in non-mortgage instruments — roughly speaking, 13% of Hong Kong’s GDP is in non-mortgage debt compared to 26% in the U.S. and 28% in the UK.
The relative significance of mortgages is important for lenders because mortgages in Hong Kong are a very low-risk credit product with high down payments across the board and 90% of all accounts held by consumers in the prime-and-better tiers. For borrowers, it’s important because the underlying asset these mortgages are funding — Hong Kong residential property — has been performing exceptionally well over the last 10 years.
From 2008 to 2018, Hong Kong house prices delivered double-digit, cumulative annual growth rates. That’s three times as much growth as shares in the city delivered, and far above what borrowers would have been paying in interest (between 2% and 3% per year for the most part). For this reason, mortgages can be seen as engines for wealth creation almost as much as debt burdens. And over the last three years, Hong Kong’s net household wealth has increased at the same rate as household debt.
In fact, when we consider this wealth creation effect, it becomes even clearer that Hong Kong households are well-placed to absorb a downturn. With almost $15 in net assets for every $1 in debt, Hong Kong households are significantly more liquid than American households (4:1), British households (3:1), and even Singaporean households (3:1).
But surely not every 10 years can deliver such consistent property price growth, and that leaves us with an important question: Just how long can the housing market sustain its current bull run? It’s a question that’s beyond my expertise to answer completely, but most economists seems to expect more of the same for the next year — albeit with an eye on rising interest rates, as they do have the potential to cool prices. With much of Hong Kong’s household wealth in property, falling house prices could make the position far less comfortable
For more insights into the Hong Kong consumer credit market, read TransUnion’s latest quarterly Industry Insights Report and other articles here.
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