Will the looming property slowdown set back Hong Kong banks?

Loan growth is expected to slow in 2018.

The real estate sector holds a disproportionate amount of influence over the fate of Hong Kong banks amidst the small economy’s strong linkages with the sector, according to credit rating agency Fitch.

“Fitch believes that property-related risk for Hong Kong banks – with accelerated growth in both commercial and residential lending – stems primarily from the small economy’s strong linkages
with the property sector and mainland China,” the credit rating agency said.

Loan demand has long propped up the growth prospects of Hong Kong banks as the city holds the world’s least affordable housing market with home prices rising for the 23rd consecutive month last March, according to real estate agency Knight Frank. An average Hong Konger, for instance, who earns $50,000 in annual income would need around $900,000 to purchase a home as the city, amid a chronic shortage of land.

However, loan growth may gradually decline from 16.4% to 14% this year as housing prices are starting to lose steam and registering lower levels of positive growth, according to BMI Research.

“Softening housing demand is likely to weigh on residential mortgage lending, which is starting to top out. According to the Hong Kong Monetary Authority (HKMA), lending for purchasing residential properties came in at 7.8% y-o-y in January from a high of 8.4% y-o-y in September 2017,” BMI added.

Also read: Hong Kong banks can withstand another housing crash

This is set to impact loan growth in Hong Kong which account for a significant share of the sector’s yearly profits, further aggravated by a slowdown in the Mainland’s economic activity as it tries to curb systemic risks in its financial industry.

“A significant and fast price decline in Hong Kong could hurt sentiment and expose imbalances as high and rising prices have boosted private-sector wealth, banks’ reserves and collateral valuations,” Fitch noted.