Long-Run Relationship and Causality between Credit Default, Banks’ Lending and Property Prices: Evidence from Hong Kong SAR

ABSTRACT Using the Autoregressive Distributed Lag technique, the paper looks for the presence of cointegrating relationships between mortgage defaults, property prices and bank lending in Hong Kong. In addition to the short-term dynamics among these variables, our findings reveal evidence of cointegrating relationships between bank lending, property prices and mortgage defaults in the long term, which governs the correction mechanism between these indicators. More importantly, loan-to-value is found to play the most effective role in curbing mortgage default risk in the loan portfolios of the Hong Kong banking sector. The findings urge the need for a multifunctional toolkit allows managing the interdependence between the banking industry and the real estate market to achieve a stable relationship between bank lending, property prices, and bank performance, hence maintaining sustainable banking soundness.