Credit-fuelled Asset Price Boom

Public debt has been found to be inefficient and diminishing in the effect on boosting economic growth (Chen et al., 2019), many governments would try quantitative easing or similar policies to urge the private sector to borrow more and spend more, including interest rate reduction and lower bank reserve ratio.

It has been exploited since the Global Financial Crisis (GFC) in 2008, not only in the US, but also in the EU and in China. However, Bezemer et al. (2018) put forward a Debt Shift Theory and contended that the real estate bubbles and stock bubbles after 2000 in many economies are fuelled by the change of the credit guidance policy.

Credit Guidance Policy is defined as any policy deployed by central banks or ministries of finance to influence the allocation of credit over alternative uses or over different sectors. (Bezemer et al., 2018, p.9)

The crux of the theory is that since debt shifts from production use to speculation use since the deregulation in the 1980s, when interest rate is ulta-low, more and more debts are used either to finance real estate investment which boosts real estate price, or for companies to buy back shares which also boosts stock price.

In fact, similar argument has been raised by Fisher’s (1933) Theory of Debt Deflation and Schumpeter’s (1939) Secondary Wave of Credit. More recently, Werner’s (2005) Quantity Theory of Credit argued that “credit creation in support of goods-and-services transactions leads to GDP growth, whereas credit created for the purchase of existing assets leads to rising prices for financial and property market assets.” (Bezemer et al., 2018, p.5)

Empirically, they found that mortgage lending in advanced economies increased from about 40% of GDP to 70% in the past 2 decades. Figure 1 shows the trends comparing mortgage and non-mortgage debts in advanced economies. The abrupt growth of mortgage debt in 2008 is unprecedented and is still kept in the 70% level even after the GFC. The intersection of the two curves implies that bank credit allocation in advanced economies over the past 30 years shifted from non-mortgage dominance to mortgage dominance after 1997, which coincided with the deregulation of financial markets in the world. Since mortgage debt is one of the major components in households debt, Mian et al. (2015) found in a global study that an increase in the Household Debt to GDP Ratio predicts lower subsequent GDP growth and higher unemployment.

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Figure 1 mortgage and non-mortgage loans in advanced economies. Source: Bezemer et al. (2018)

Bezemer et al. (2018) hypothesized that the post-2000 interventions focused primarily on financial stability rather than credit guidance to support productive sectors of the economy, which resulted in the over-concentration of credit in real estate markets and stock markets, and thus a credit-fuelled asset price boom.

Can the theory explain the situation in Hong Kong? HKMA (2018) however contended that Hong Kong is safe. Figure 2 shows the various components of Households Debt to GDP Ratio in the past 20 years. Residential Mortgage to GDP Ratio is in fact decreasing from above 50% in 2003 to less than 50% in 2018. Even though the total Household Debt to GDP Ratio has been increasing from about 50% in 2008 to above 70% in 2018, most of the growth comes from the loans for other private purposes.

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Figure 2 mortgage and non-mortgage household loans in Hong Kong. Source: HKMA (2018)

Furthermore, HKMA (2018) also posited that “Hong Kong’s household sector is found to have a high safe assets-to-liabilities ratio, suggesting that households have a strong buffer to withstand property price shocks.” (p.8) It compared the trends of Household Debt and Housing Prices in the Pre-AFC and the Post-GFC periods, as shown in Figure 3, and argued that this round of the property market upcycle is NOT caused by a credit-led asset price boom!

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Figure 3 Household Debt and Housing Price Trends in the Pre-AFC and the Post-GFC Periods. Source: HKMA (2018)

Yet, since the chart counts the residential mortgage loans by the authorized institutions (AIs)only, it may ignore some of the most recent developments in the credit markets. For example, more and more 2nd and 3rd mortgages are borrowed from non-AIs, many lendings are for non-housing investment, and some purchases of real estate assets are financed by non-local financial institutions. All these sources of credit-fuelled asset price booming are not reflected in the chart.

It has also been found that higher and higher proportion of mortgage loans are for refinancing purposes. Some of them are for refinancing newly purchased housing units. It results in an over-concentration of mortgage loans in the AI’s asset portfolios. It would be discussed in my coming HKEJ article Yiu (April 2019).


Bezemer, D., Ryan-Collins, J., van Lerven, F. and Zhang, L. (2018). Credit where it’s due: A historical, theoretical and empirical review of credit guidance policies in the 20th century. UCL Institute for Innovation and Public Purpose Working Paper Series (IIPP WP 2018–11).

Chen, S. and Ratnovski, L. and Tsai, P.H. (2019) Credit and Fiscal Multipliers in China. BOFIT Discussion Paper #5/2019. SSRN:

Fisher, I. (1933) The debt-deflation theory of great depressions. Econometrica: Journal of the Econometric Society, 1(4), pp. 337–357.

HKMA (2018) Understanding Household Indebtedness in Hong Kong, Sep 14, Research Memo 07/2018, Hong Kong Monetary Authority.

Mian, A., Sufi, A. & Verner, E. (2015) Household debt and business cycles worldwide. Cambridge, Massachusetts: National Bureau of Economic Research.

Schumpeter, J. A. (1939) Business cycles, Vol. 1. New York: McGraw-Hill

Yiu, C.Y. (2019) Increasing Proportion of Refinancing in Mortgage Loans in Hong Kong, Hong Kong Economic Journal 505 (forthcoming)

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ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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