Hong Kong's Mortgage Market Divergence: A Strategic Shift for Investors in Real Estate and Banking

The Hong Kong residential mortgage market is undergoing a seismic shift, with starkly contrasting trends emerging in primary and secondary market demand. While secondary mortgage loans surged by 17.6% in April 2025 to HK$13.7 billion, primary market financing plummeted 7.5% to HK$9.3 billion. This divergence, fueled by shifting borrower preferences, HIBOR pricing dynamics, and a narrowing refinancing window, presents both opportunities and risks for investors in Hong Kong's real estate and banking sectors.

The Secondary Market Surge: A Buying Opportunity?

The secondary market's dominance signals a strategic shift toward affordability and liquidity. Property prices have fallen 13.2% year-on-year, with smaller units (under 40 sq.m) dropping 16.2%, making resale properties more accessible. Government policy adjustments, such as raising the stamp duty threshold to HK$4 million in February 2025, have further boosted demand in the HK$3–4 million price bracket—now accounting for 24% of secondary transactions in April.

For investors, this suggests a prime entry point into undervalued resale properties. However, the market's transaction volumes remain 26.8% below pre-pandemic levels, indicating lingering uncertainty. The key is to focus on mid-tier neighborhoods where affordability meets steady demand, such as Kowloon Tong or Tsuen Wan.

Primary Market Slump: A Warning for Developers

The 16.8% March-to-April drop in primary market loans underscores a slowdown in new developments. Builders face a double whammy: falling transaction volumes (down 20.2% year-on-year in early 2024) and overhang from past oversupply. This creates a “buyers' market” for investors seeking discounted land or distressed developments.

However, caution is warranted. Developers with high debt levels—such as smaller firms exposed to nonprime projects—face liquidity risks. Focus instead on established players like Sun Hung Kai or New World Development, which have robust balance sheets and strategic land banks.

HIBOR Pricing: A Double-Edged Sword

The dominance of HIBOR-linked mortgages (now 91.8% of new loans) reflects borrowers' preference for floating rates. While this aligns with expectations of stable short-term rates, it exposes households to interest rate volatility. A prolonged high-rate environment could strain borrowers, particularly those who took on record-high mortgage ratios (63.2% in February 2025) or stretched loan terms (324 months, or 27 years).

For investors, this means monitoring HIBOR movements closely. A sustained dip could trigger refinancing waves, boosting banks' fee income. Conversely, rising rates could amplify defaults—a risk for lenders with high real estate exposure.

The Refinancing Window Closes: Banks at a Crossroads

Refinancing loans fell 23.5% in April to HK$2.3 billion, as borrowers avoid high rates. This signals a shrinking refinancing pipeline for banks, which have seen their real estate loan exposure grow to 25.75% of total loans. Hang Seng Bank, with 36.34% of loans tied to real estate, faces heightened scrutiny, while smaller banks exposed to nonprime projects are even riskier.

Investors should prioritize banks with diversified portfolios and strong capital buffers. HSBC and Standard Chartered, with lower real estate exposure (18–20%), may offer safer havens. Meanwhile, the sector's low delinquency rates (0.13%) provide short-term comfort—but prolonged stagnation in property prices could test this resilience.

Investment Strategy: Leverage the Divergence

1. Secondary Market Plays:
2. Invest in REITs like Link REIT or Sun Hung Kai Properties, which benefit from steady rental income and undervalued assets.

3. Target secondary property funds or platforms like Hong Kong Property Holdings, which capitalize on price discounts.

4. Banking Sector Selectivity:

5. Avoid banks overly reliant on real estate loans (e.g., Hang Seng). Instead, favor diversified institutions like DBS or OCBC, which have lower exposure to Hong Kong's volatile property market.

6. Hedging Against Rate Volatility:

7. Use inverse ETFs (e.g., ProShares Short Hong Kong ETF) to profit from potential HIBOR declines.
8. Pair mortgage-backed securities (MBS) with interest rate futures to mitigate risk.

The Bottom Line

Hong Kong's mortgage market divergence is a clarion call for strategic investors. While the secondary market offers entry points into undervalued assets, the primary sector's slump and refinancing slowdown demand caution. Monitor HIBOR trends, prioritize banks with prudent risk management, and capitalize on policy-driven demand in the resale segment. Act now—before the window on this asymmetric opportunity closes.