Hong Kong’s long-running real estate downturn is emerging as a critical stress test for the city’s financial system, with falling property values weighing heavily on banks and investors alike.
Residential and commercial property prices have dropped by more than 30 per cent since 2021, a reversal triggered by the COVID-19 pandemic, rising U.S. interest rates and ongoing geopolitical strains between Washington and Beijing.
The city, once home to the world’s most expensive housing market, is now grappling with a sustained correction that is reverberating through its economy.
The slump has already forced some investors to surrender flagship assets, according to Reuters.
Among the most striking examples is the $5.2 billion (AUD $8.1 billion) office tower known as The Center, which was sold by CK Asset in 2017 at a record price.
Several members of the consortium that bought the building have since been unable to service their debt, resulting in banks seizing and reselling floors at steep discounts.
For lenders, the strain is showing up most visibly in non-performing loans (NPLs).
Hang Seng Bank, which holds around HK$123 billion (AUD $24.3 billion) in commercial property exposure, has seen its bad loan ratio climb from just over 1 per cent in 2021 to nearly 7 per cent.
Other institutions have also reported rising impairment charges linked to property developers and office landlords under pressure.
Some bankers and analysts have floated the possibility of creating a “bad bank” to ringfence soured real estate loans, though regulators are pushing back on the idea.
The Hong Kong Monetary Authority (HKMA) has stressed that local banks are well-capitalised and that earlier prudential measures, such as tighter lending rules and higher capital buffers, have helped limit systemic risk.
Even so, the downturn is forcing lenders to rethink strategies.
Loan restructurings are becoming more common as banks seek to avoid fire sales, while developers are under pressure to cut prices and offload non-core assets.
Analysts warn that prolonged weakness could affect broader credit conditions, especially if commercial property values slide further.
Hong Kong’s property market has endured downturns before, most notably during the Asian financial crisis of the late 1990s, but the current decline is notable for its depth and persistence.
With office vacancies near record highs and housing affordability still stretched despite falling prices, the recovery path remains uncertain.
For now, the city’s property slump is serving as a real-world test of resilience for one of Asia’s most important banking hubs, and one that global investors are watching closely.
