HK’s Mortgage Refinancing may cause the next Debt Crisis

Khandani, Lo and Merton (2013) reviewed the US Subprime Crisis 2006 and found that “the combination of rising home prices, declining interest rates, and near-frictionless refinancing opportunities can create unintentional synchronization of homeowner leverage, leading to a ratchet effect on leverage.” Their simulation even shows that the cash-out refinancing debts had caused an extra $1.7 trillion loss from June 2006 to December 2008. Worse still, such a refinancing ratchet effect is a new type of systemic risk in the financial system that could trigger a financial crisis even without any dysfunctional behaviors.

Unfortunately, such an important lesson was not learned by the Hong Kong Government or the de facto Central Bank (HKMA). Two years ago when I warned the President of HKMA on the fast growth of the proportion of mortgage refinancing during a legislative council debate, he simply ignored the warning by repeating that the current risk management system is effective. However, he might underestimate the new ratchet effect of mortgage refinancing which could cause the Global Financial Crisis.

It is very rare to find any previous studies on mortgage refinancing in Hong Kong, I am probably the only researchers who have kept a close scrutinization on the change of the proportion of mortgage refinancing. I have raised the concern firstly in 2013 (Figure 1) and then again in 2016 (Figure 2).

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Figure 1 A discussion on the cause of mortgage refinancing in Hong Kong. Published in Nov 2013
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Figure 2 A warning on the risk of mortgage refinancing. Published in Mar 2016

Before 2015, mortgage refinancing, in general, accounted for less than 15% of the total mortgage loans every month. For example, the proportion was only 13% in July 2014, and the amount of refinancing was only $3.79b. However, in the past 5 years, the proportion of refinancing has been sharply increasing, and the most recent peak of refinancing proportion was 43% in September 2018, and the amount of refinancing was shot up to $13.6b. It is almost a 3.5-fold increase in 5-year time.

The whole 5-year time series of the amount and the proportion of mortgage refinancing to the total amount of mortgage loans would be reported separately in early May at the monthly issue of Hong Kong Economic Journal (Yiu, 2019). It would also explain why suddenly the proportion of mortgage refinancing would swiftly go up.

Bearing in mind that mortgage loans are cumulative, unless the borrowers prepay the debts. Thus, it is estimated that the total outstanding amount of mortgage refinancing loans approved in the past 5 years amounts to over HK$400b. It accounts for about 1/3 of the total outstanding mortgage loans of HK$1328b in February 2019.

Khandani, Lo and Merton (2013) warned that the impact of mortgage refinancing is a one-sided ratchet effect, it can be growing very fast when housing price goes up and interest rate is low, but it can hardly be reducing without causing a financial crisis when housing price drops or interest rate goes up, since a mortgage loan cannot be subdivided by selling part of the housing unit.

With all the three conditions raised by Khandani, Lo and Merton (2013) have been met in Hong Kong, the next debt crisis may be caused by the excessive mortgage refinancing. it is our moral duty as a researcher to make the warning to the public.


Khandani, A.E., Lo, A.W. and Merton, R. (2013) Systemic risk and the refinancing ratchet effect, Journal of Financial Economics 108 (1), 29–45.

Yiu, C.Y. (2019) Mortgage Refinancing has been Upsurged in Hong Kong, hkej 506, May (forthcoming). [in Chinese]

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

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