Rising interests rates means more pain for Hongkongers, says HKMA

Ratio of household debt to GDP increases to a high of 62 per cent, putting families at risk

PUBLISHED : Thursday, 26 September, 2013, 12:00am
UPDATED : Thursday, 26 September, 2013, 3:04am

Rising interest rates in future could spell greater pain for Hongkongers as household debt in the city soars to all-time highs, even as they borrow less to buy homes.

The ratio of household debt to gross domestic product rose to a record 62 per cent in June from 61 per cent in March and 59 per cent at the end of last year, the Hong Kong Monetary Authority said in a half-yearly report yesterday.

The increasing ratio was a "warning signal" to the economy, HKMA chief executive Norman Chan Tak-lam said in May.

Household debt includes credit card loans, personal loans and home loans - which are usually a family's largest debt. The higher the ratio, the more vulnerable borrowers will be when interest rates go up.

Interest rates in Hong Kong, with a currency pegged to the US dollar, should rise when the US Federal Reserve delivers on its promise to wind down its quantitative easing, as is widely expected within months.

During the last cycle of rising interest rates in 1994-1995, when the Fed raised its benchmark interest rate to 6 per cent from 3 per cent, the impact on Hong Kong was relatively mild, the HKMA said.

"The potential impact on Hong Kong from [the] Fed's policy normalisation could be larger [than in 1994-1995], given that some domestic imbalances have been building up, particularly in the property market," it said.

Property transaction volumes have been muted after the government rolled out several rounds of measures to curb property prices.

These measures, the HKMA said, had helped bring down the loan-to-value ratio for new mortgages to an average of 56 per cent in June from 64 per cent before they were brought in, and the debt-servicing ratio to 36 per cent from over 40 per cent.

The HKMA also reported that pre-tax profit of retail banks had grown 30.9 per cent in this year's first half from the second half of last year.

Net interest margin, a measure of lending profitability, rose to 1.41 per cent in the first half from 1.37 per cent in the previous six months as ample liquidity drove down banks' average funding costs.

The capital adequacy ratio of locally incorporated banks rose to 15.9 per cent at the end of June from 15.7 per cent at the end of last year. But the tier-one capital adequacy ratio edged down to 13.2 per cent from 13.3 per cent.