ABSTRACT We study the stability of Hall magnetohydrodynamic with strong magnetic fields in which Landau quantization of electrons is important. We find that the strong-field Hall modes can be destabilized by the dependence of the differential magnetic susceptibility on magnetic field strength. This hydrodynamic instability, thermodynamic in origin and stabilized by magnetic domain formation, is studied using linear perturbation theory. It is found to have typical growth time of order ≲103 yr, with the growth time decreasing as a function of wavelength of the perturbation. The instability is self-limiting, turning off following a period of local field growth by a few per cent of the initial value. Finite temperature is also shown to limit the instability, with sufficiently high temperatures eliminating it altogether. Alfvén waves can show similar unstable behaviour on shorter time-scales. We find that Ohmic heating due to the large fields developed via the instability and magnetic domain formation is not large enough to account for observed magnetar surface temperatures. However, Ohmic heating is enhanced by the oscillatory differential magnetic susceptibility of Landau-quantized electrons, which could be important to magnetothermal simulations of neutron star crusts.