Table of Contents
The Hong Kong economy has faced multiple challenges in recent years. Some of these factors may indeed lead to downward pressure on the economy. The emergence of the problem of "negative assets" (i.e. the market value of a property is lower than the outstanding mortgage loan) is a direct reflection of the fluctuations in the real estate market. The following is an analysis of possible causes and correlations from multiple levels:
1. Structural reasons for Hong Kong’s economic downturn
1. External environmental shock
- Global economic slowdown and geopolitical risks: The US-China trade war, technology war, Russia-Ukraine conflict, etc. have led to the reorganization of the international supply chain. As an export-oriented economy (trade accounts for about 200% of GDP), Hong Kong is the first to be affected.
– Interest rate pressure under the linked exchange rate system: Hong Kong follows the United States in raising interest rates to maintain the stability of the Hong Kong dollar exchange rate, resulting in higher borrowing costs, which in turn dampens corporate investment and personal consumption.
2. Imbalance in internal economic structure
- Over-reliance on finance and real estate: Finance and real estate account for too high a proportion of GDP (approximately 20-25%), the industry is not diversified enough, and the ability to resist risks is weak.
– Population aging and brain drain: Low fertility rates and immigration waves exacerbate labor shortages, with a net outflow of 113,000 people in 2022, affecting consumption and innovation capabilities.
3. Slow recovery after the epidemic
- Tourism and retail industries have been hit hard: Before the epidemic, the tourism industry accounted for about 4.5% of GDP, but the number of visitors to Hong Kong has not recovered to the 2019 level by 2023, dragging down industries such as retail and hotels.
2. Causes and impacts of negative equity problems
1. Real estate market adjustment
– Rising interest rates and declining purchasing power: Under the US Federal Reserve’s interest rate hike cycle, Hong Kong’s prime rate (P Rate) rose to 5.875% (2023), and the mortgage burden ratio exceeded 70%, putting demand under pressure.
- Increased supply and shrinking demand: The government’s “Lantau Tomorrow” and other plans are expected to increase land supply. At the same time, the immigration wave reduces rigid demand, and housing prices will fall by about 15-20% from the high in 2021 (as of the end of 2023).
2. The knock-on effect of negative equity
– Reversal of wealth effect: About 601% of Hong Kong people’s wealth is concentrated in real estate, and falling property prices suppress consumption willingness.
– Financial system risks: The number of negative-equity residential mortgages rose to more than 25,000 in the fourth quarter of 2023, and banks’ bad debt risk increased, which could tighten credit and exacerbate economic contraction.
3. Policy and market confidence factors
- Delayed adjustment of “tough measures”: Although stamp duty and mortgage ratio will be relaxed in 2023, the market remains skeptical about the long-term prospects of the property market, and investment demand has not clearly picked up.
– International ratings downgrade: Fitch downgraded Hong Kong’s credit rating to “AA-” in 2023, reflecting concerns about fiscal stability and governance capabilities.
III. Future Challenges and Response Directions
1. Short-term risks
– If the US maintains high interest rates, the Hong Kong property market may further adjust and the negative equity problem may worsen.
– Geopolitical tensions (such as Western sanctions on Hong Kong) may impact its status as an international financial centre.
2. Key to mid- to long-term transformation
– Industrial diversification: Promote emerging industries such as innovation and technology (such as the development of the Hetao District), green finance, and Web3.
– Integration into the Greater Bay Area: Deepen collaboration with Mainland cities, such as expanding cross-border financial services and scientific and technological innovation cooperation.
- Housing policy reform: increase public housing supply and reduce citizens’ reliance on the private housing market.
Summarize
Hong Kong’s economic downturn and negative asset problem are the result of a combination of internal and external factors, including changes in the global political and economic landscape, the fragility of the industrial structure, and cyclical adjustments in the real estate market. To break the predicament, it is necessary to strike a balance between stabilizing the financial system, promoting industrial upgrading, and improving people's livelihood policies, while actively seizing the opportunities of the Greater Bay Area integration. The next few years will be a critical period for Hong Kong's economic transformation, and policy flexibility and social cohesion will be crucial.
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