Hong Kong's financial sector and regulators have sounded the alarm that the property market is showing the most serious signs of a downturn since the 1997 Asian financial crisis. In recent months, the Hong Kong Monetary Authority (HKMA), which effectively serves as Hong Kong's Central Bank, has been scrutinizing more strictly the potential for banks' nonperforming loans and whether to expand credit lines to small developers. Banks have received internal warnings that the value of collateral underpinning hundreds of billions of dollars in property-related loans needs to be reassessed.
According to Bloomberg on the 18th (local time), with commercial real estate remaining a key pillar of Hong Kong's economy, many bankers and property consultants said regulators widening their oversight to include small developers was a "sign of growing market anxiety." In response, an HKMA Spokesperson said, "It has long been a basic principle for banks to handle risky lending with care."
Hong Kong's residential and commercial real estate have both shown a distinctly weak trend recently. According to the property research firm Global Property Guide, Hong Kong residential housing prices fell about 7.8% year over year in the first quarter, and the luxury housing market plunged about 14.3% year over year in the second quarter. The Hong Kong commercial office market has also maintained a high vacancy rate in recent years as an oversupply has built up. Amid this trend, internal reports said the HKMA is conducting monthly checks on whether banks will participate in refinancing transactions that ask whether to roll over existing loans, and on risks from declining collateral values.
A primary cause of Hong Kong's property slump is the weakening of its own demand base. As U.S.-China tensions intensify, global companies have begun to feel burdened about using Hong Kong as their Asia headquarters, a trend that became more pronounced after the pandemic. In practice, as foreign financial, consulting, and technology firms transferred to places like Singapore, office demand fell, and the departure of high-income foreigners weakened housing demand as well. Coupled with population outflows, this has shaken Hong Kong's foundation as a global business hub.
On top of that, a worsening financial environment and oversupply amplified the shock. Because Hong Kong maintains a dollar currency peg, when U.S. interest rates rise, Hong Kong must raise rates as well. As a result, both developers and landlords have shouldered heavy interest burdens, and borrowing expenses have risen, sharply tightening finances. On the supply side, office and retail projects launched before the pandemic hit the market all at once, driving up vacancy rates. But fundamental shifts in demand since the pandemic—such as remote and hybrid work and the expansion of online consumption—have prevented an environment for rents to recover.
Banks in Hong Kong are also under direct pressure. According to Reuters, data showed that in some banks' loan portfolios, the share of commercial real estate loans has climbed to about 8% of total loans in the banking system. In particular, for the developer Lai Sun Development, during negotiations early this year to refinance HK$3.6 billion (about 677.8 billion won), only half of the lending institutions considered extending credit, and multiple banks reportedly received calls from an HKMA official. As borrowing and refinancing pressures become reality, regulatory intervention has visibly intensified.
Even so, the HKMA has repeatedly said "the capital ratio of the banking system as a whole remains adequate." However, experts stressed, "Rather than a single factor of a property plunge, the market has entered a structurally declining phase with multiple factors overlapping," adding that "simultaneous and coordinated exit strategies are needed." Some warned, "There is still no direct evidence indicating an imminent market collapse, but the possibility that multiple firms will try to exit at the same time always exists."