Asia Housing Boom Stalls as Tightening Puts Brake on Prices
Shamim Adam and Malcolm Scott, Bloomberg 17 June 2011
From Mumbai to Melbourne, Asia’s property boom is stalling as the world’s highest interest rates and government efforts to curb prices take hold.
In China’s biggest cities, growth slowed in April after the government stepped up property measures. In India and Australia, prices are falling after the steepest interest rate increases among major economies. In the financial hubs of Hong Kong and Singapore, price growth is moderating after increased deposit requirements and land releases. In Japan, the worst earthquake on record snuffed out signs of a recovery, while South Korean banks remain weighed by soured property loans.
“Across Asia-Pacific, you have seen a policy induced pullback,” said Rod Cornish, head of real estate strategy at Macquarie Capital Advisers in Sydney. “It’s a required pullback because if some of these markets had been allowed to continue, you would have had more overbuilding, more overvaluation, and a bigger correction down the track.”
Asia’s recovery from the credit crisis turned into a boom for many of the region’s property markets as surging economic growth and low interest rates threatened to create an asset bubble jeopardizing the world’s fastest economic expansion. The signs of moderation in prices may reduce the need for further tightening measures and bring Asia closer in line with Europe and the U.S., where housing markets remain weak almost three years after the collapse of Lehman Brothers Holdings Inc.
Home prices in 20 U.S. cities dropped in March to the lowest level since 2003, showing housing remains mired in a slump almost two years into the economic recovery. Prices in Ireland, among the worst hit nations by the global recession, fell 1 percent in April from March and have now tumbled 40 percent since peaking in 2007.
Cooling Momentum
“Central banks are raising rates and that is certainly helping to cool the momentum along with the different macro-prudential measures,” said Tai Hui, the Singapore-based head of Southeast Asian economic research for Standard Chartered Plc. “We are still expecting more rate increases which will continue to be helpful in containing any exuberance in the property markets.”
Asia’s developing economies will grow 8.4 percent this year, compared with 1.6 percent in the euro region and 2.8 percent in the U.S., according to International Monetary Fund projections. China’s economy is forecast by the IMF to expand 9.6 percent this year.
A record $2.7 trillion of loans extended over two years helped fuel China’s property prices to record levels even as authorities set price ceilings, demanded higher deposits, and limited second-home purchases. China’s fixed-asset investment excluding rural households expanded 25.8 percent in the first five months of the year, up from 25.4 percent in January-through-April.
Wen’s Pledge
Chinese Premier Wen Jiabao said on May 1 that the nation is “determined” to bring down housing prices in some cities to a “reasonable” level. The government raised the minimum down payment for second-home purchases this year and introduced residential taxes in Shanghai and Chongqing. Beijing and Guangzhou also imposed restrictions on housing purchases.
The measures may have had some effect. China’s home prices rose at a slower pace in major cities in April even as they quickened in smaller ones. The government last month said it won’t ease property curbs and ordered local officials to continue to implement measures to control prices.
“Most speculators have been weeded out of the bigger first-tier cities and we can see a significant slowdown there as they move on to smaller cities with fewer restrictions,” said Liu Li-gang, who formerly worked for the World Bank and is chief China economist at Australia & New Zealand Banking Group Ltd. In Hong Kong. “Underlying demand for property is still strong but we aren’t likely to see rapid price increases as we have seen previously.”
Standard & Poor’s on June 15 cut the ratings outlook on Chinese developers to “negative” from “stable,” saying tighter credit and further government curbs may lead to rating downgrades in the next year. Property sales may start to slow as the government’s policy “starts to bite,” leading to price cuts that may drive home prices 10 percent lower in the next 12 months, the credit rating company said.
China’s central bank this week increased banks’ reserve requirements to drain cash from the economy after consumer prices rose 5.5 percent in May, the biggest gain since 2008. The national statistics bureau is scheduled to report May’s home price data on June 18.
‘Bubble’ Warning
Hong Kong, which Savills Plc says is the world’s most expensive place to buy an apartment, reported the number of home-sale transactions fell for a fifth straight month in May amid rising mortgage rates. Home prices have surged about 70 percent since the start of 2009 on record-low borrowing costs and an influx of buyers from other Chinese cities.
The city’s Chief Executive Donald Tsang said in an interview in Melbourne today that home prices are “quite frightening” as growing wealth in China fuels increases of 2 percent a month.
HSBC Holdings Plc and other lenders raised mortgage rates in Hong Kong after the central bank in April warned of the risk of a “credit-fuelled property bubble.” Hong Kong home prices could fall as much as 20 percent in 2012 because of higher mortgage rates, according to Barclays Capital Asia Ltd.
The Hong Kong Monetary Authority has tightened rules on mortgage lending four times since October 2009, most recently on June 10 when it raised down payments for homes costing more than HK$6 million ($771,000) and increased deposits for foreign buyers. HKMA Chief Executive Norman Chan said property curbs introduced by the government have reduced speculation.
“Credit conditions have become more onerous and that has helped take some steam out of the property market across Asia,” said Vishnu Varathan, an economist at Capital Economics (Asia) Pte in Singapore. “Gains in property markets around the region have slowed but they haven’t decisively peaked.”
Singapore Curbs
In Singapore, where demand for private homes and mortgages has boosted earnings for companies including lender DBS Group Holdings Ltd. and real-estate developer City Developments Ltd., measures to curb property speculation have resulted in slower price gains for six consecutive quarters.
The government in January raised the down payment on second mortgages and extended the sales tax for home sales to four years from three as it added more rules to curb speculation. Sales transactions are still rising as foreigners increase purchases in the city-state, even as price gains slow.
“As long as the low interest rate environment prevails, the risk of further asset inflation in the property sector is still pretty real” in Singapore and Hong Kong, Standard Chartered’s Hui said. “For these two economies, rates are still very accommodative and will remain so until the Federal Reserve starts to hike. Foreign participation in Hong Kong and Singapore are also very large and that skews things a bit.”
Property cycles in the two cities are much shorter than in other parts of Asia, at about three to four years from trough to peak, said Macquarie’s Cornish. Authorities in both centers are aiming to achieve price stability rather than declines, Cornish said, with Hong Kong’s measures constrained by the currency’s peg to the U.S. dollar.
“They have an economy tied to China and rates tied to the U.S.,” Cornish said. “In Hong Kong, you’ll see a more sizable impact on prices when rates start to pick up in the U.S.”
In India, where the central bank has raised rates 10 times since March last year, Mumbai home prices have declined 20 percent from their 2010 peak. Lower sales, higher land values and increased borrowing costs are forcing developers to reduce prices, according to Jones Lang LaSalle India. Prices in the city may decline as much as 35 percent over the next two years, according to Liases Foras Real Estate Rating & Research Pvt.
Still Hawkish
Australia, the first Group of 20 nation to start raising rates after the global financial crisis, boosted borrowing costs in part to contain house prices. Demand for mortgages grew at the slowest pace since at least 1977 in April.
After seven increases since October 2009, Australia now has the highest benchmark rate in the developed world and home prices are falling at the fastest pace since the crisis. The Reserve Bank of Australia on June 7 cited softening house prices and modest credit growth in a statement explaining its decision to keep interest rates on hold this month.
“The central bank’s base case is that the housing market is subdued and the consumer remains on the sidelines,” said Kieran Davies, a Sydney-based economist at Royal Bank of Scotland Group Plc. Still, an expected pick-up in inflation means “there is still a tightening bias.”
RBA Governor Glenn Stevens on June 15 reiterated that policy makers may need to raise interest rates at some stage.
Policy Caution
Japan land values declined at more than two-thirds of the country’s land sites in the three months ended April 1 after March 11’s record earthquake and tsunami slowed a recovery in the property market, according to a quarterly land ministry survey on May 27. The bad-loan ratio for South Korean bank lending for real-estate projects rose to 18.35 percent in the first quarter as builders sought bankruptcy protection or debt rescheduling, the Financial Supervisory Service said on May 20.
As a struggling U.S. economy, European debt woes and a Japanese recession weigh on global growth, Asia’s policy makers may be reluctant to impose more measures to damp home prices.
“Property markets react with a much longer lag than the rest of the economy and insofar that we continue to see the rate of transactions ease and slower price gains, that may be cue enough for policy makers to back away a bit,” Varathan of Capital Economics said. “They won’t want to overact and see the whole market crashing down.”
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Asia Housing Boom Stalls as Tightening Puts Brake on Prices
Shamim Adam and Malcolm Scott, Bloomberg
17 June 2011
From Mumbai to Melbourne, Asia’s property boom is stalling as the world’s highest interest rates and government efforts to curb prices take hold.
In China’s biggest cities, growth slowed in April after the government stepped up property measures. In India and Australia, prices are falling after the steepest interest rate increases among major economies. In the financial hubs of Hong Kong and Singapore, price growth is moderating after increased deposit requirements and land releases. In Japan, the worst earthquake on record snuffed out signs of a recovery, while South Korean banks remain weighed by soured property loans.
“Across Asia-Pacific, you have seen a policy induced pullback,” said Rod Cornish, head of real estate strategy at Macquarie Capital Advisers in Sydney. “It’s a required pullback because if some of these markets had been allowed to continue, you would have had more overbuilding, more overvaluation, and a bigger correction down the track.”
Asia’s recovery from the credit crisis turned into a boom for many of the region’s property markets as surging economic growth and low interest rates threatened to create an asset bubble jeopardizing the world’s fastest economic expansion. The signs of moderation in prices may reduce the need for further tightening measures and bring Asia closer in line with Europe and the U.S., where housing markets remain weak almost three years after the collapse of Lehman Brothers Holdings Inc.
Home prices in 20 U.S. cities dropped in March to the lowest level since 2003, showing housing remains mired in a slump almost two years into the economic recovery. Prices in Ireland, among the worst hit nations by the global recession, fell 1 percent in April from March and have now tumbled 40 percent since peaking in 2007.
Cooling Momentum
“Central banks are raising rates and that is certainly helping to cool the momentum along with the different macro-prudential measures,” said Tai Hui, the Singapore-based head of Southeast Asian economic research for Standard Chartered Plc. “We are still expecting more rate increases which will continue to be helpful in containing any exuberance in the property markets.”
Asia’s developing economies will grow 8.4 percent this year, compared with 1.6 percent in the euro region and 2.8 percent in the U.S., according to International Monetary Fund projections. China’s economy is forecast by the IMF to expand 9.6 percent this year.
A record $2.7 trillion of loans extended over two years helped fuel China’s property prices to record levels even as authorities set price ceilings, demanded higher deposits, and limited second-home purchases. China’s fixed-asset investment excluding rural households expanded 25.8 percent in the first five months of the year, up from 25.4 percent in January-through-April.
Wen’s Pledge
Chinese Premier Wen Jiabao said on May 1 that the nation is “determined” to bring down housing prices in some cities to a “reasonable” level. The government raised the minimum down payment for second-home purchases this year and introduced residential taxes in Shanghai and Chongqing. Beijing and Guangzhou also imposed restrictions on housing purchases.
The measures may have had some effect. China’s home prices rose at a slower pace in major cities in April even as they quickened in smaller ones. The government last month said it won’t ease property curbs and ordered local officials to continue to implement measures to control prices.
Negative Outlook
“Most speculators have been weeded out of the bigger first-tier cities and we can see a significant slowdown there as they move on to smaller cities with fewer restrictions,” said Liu Li-gang, who formerly worked for the World Bank and is chief China economist at Australia & New Zealand Banking Group Ltd. In Hong Kong. “Underlying demand for property is still strong but we aren’t likely to see rapid price increases as we have seen previously.”
Standard & Poor’s on June 15 cut the ratings outlook on Chinese developers to “negative” from “stable,” saying tighter credit and further government curbs may lead to rating downgrades in the next year. Property sales may start to slow as the government’s policy “starts to bite,” leading to price cuts that may drive home prices 10 percent lower in the next 12 months, the credit rating company said.
China’s central bank this week increased banks’ reserve requirements to drain cash from the economy after consumer prices rose 5.5 percent in May, the biggest gain since 2008. The national statistics bureau is scheduled to report May’s home price data on June 18.
‘Bubble’ Warning
Hong Kong, which Savills Plc says is the world’s most expensive place to buy an apartment, reported the number of home-sale transactions fell for a fifth straight month in May amid rising mortgage rates. Home prices have surged about 70 percent since the start of 2009 on record-low borrowing costs and an influx of buyers from other Chinese cities.
The city’s Chief Executive Donald Tsang said in an interview in Melbourne today that home prices are “quite frightening” as growing wealth in China fuels increases of 2 percent a month.
HSBC Holdings Plc and other lenders raised mortgage rates in Hong Kong after the central bank in April warned of the risk of a “credit-fuelled property bubble.” Hong Kong home prices could fall as much as 20 percent in 2012 because of higher mortgage rates, according to Barclays Capital Asia Ltd.
The Hong Kong Monetary Authority has tightened rules on mortgage lending four times since October 2009, most recently on June 10 when it raised down payments for homes costing more than HK$6 million ($771,000) and increased deposits for foreign buyers. HKMA Chief Executive Norman Chan said property curbs introduced by the government have reduced speculation.
“Credit conditions have become more onerous and that has helped take some steam out of the property market across Asia,” said Vishnu Varathan, an economist at Capital Economics (Asia) Pte in Singapore. “Gains in property markets around the region have slowed but they haven’t decisively peaked.”
Singapore Curbs
In Singapore, where demand for private homes and mortgages has boosted earnings for companies including lender DBS Group Holdings Ltd. and real-estate developer City Developments Ltd., measures to curb property speculation have resulted in slower price gains for six consecutive quarters.
The government in January raised the down payment on second mortgages and extended the sales tax for home sales to four years from three as it added more rules to curb speculation. Sales transactions are still rising as foreigners increase purchases in the city-state, even as price gains slow.
“As long as the low interest rate environment prevails, the risk of further asset inflation in the property sector is still pretty real” in Singapore and Hong Kong, Standard Chartered’s Hui said. “For these two economies, rates are still very accommodative and will remain so until the Federal Reserve starts to hike. Foreign participation in Hong Kong and Singapore are also very large and that skews things a bit.”
Faster Cycles
Property cycles in the two cities are much shorter than in other parts of Asia, at about three to four years from trough to peak, said Macquarie’s Cornish. Authorities in both centers are aiming to achieve price stability rather than declines, Cornish said, with Hong Kong’s measures constrained by the currency’s peg to the U.S. dollar.
“They have an economy tied to China and rates tied to the U.S.,” Cornish said. “In Hong Kong, you’ll see a more sizable impact on prices when rates start to pick up in the U.S.”
In India, where the central bank has raised rates 10 times since March last year, Mumbai home prices have declined 20 percent from their 2010 peak. Lower sales, higher land values and increased borrowing costs are forcing developers to reduce prices, according to Jones Lang LaSalle India. Prices in the city may decline as much as 35 percent over the next two years, according to Liases Foras Real Estate Rating & Research Pvt.
Still Hawkish
Australia, the first Group of 20 nation to start raising rates after the global financial crisis, boosted borrowing costs in part to contain house prices. Demand for mortgages grew at the slowest pace since at least 1977 in April.
After seven increases since October 2009, Australia now has the highest benchmark rate in the developed world and home prices are falling at the fastest pace since the crisis. The Reserve Bank of Australia on June 7 cited softening house prices and modest credit growth in a statement explaining its decision to keep interest rates on hold this month.
“The central bank’s base case is that the housing market is subdued and the consumer remains on the sidelines,” said Kieran Davies, a Sydney-based economist at Royal Bank of Scotland Group Plc. Still, an expected pick-up in inflation means “there is still a tightening bias.”
RBA Governor Glenn Stevens on June 15 reiterated that policy makers may need to raise interest rates at some stage.
Policy Caution
Japan land values declined at more than two-thirds of the country’s land sites in the three months ended April 1 after March 11’s record earthquake and tsunami slowed a recovery in the property market, according to a quarterly land ministry survey on May 27. The bad-loan ratio for South Korean bank lending for real-estate projects rose to 18.35 percent in the first quarter as builders sought bankruptcy protection or debt rescheduling, the Financial Supervisory Service said on May 20.
As a struggling U.S. economy, European debt woes and a Japanese recession weigh on global growth, Asia’s policy makers may be reluctant to impose more measures to damp home prices.
“Property markets react with a much longer lag than the rest of the economy and insofar that we continue to see the rate of transactions ease and slower price gains, that may be cue enough for policy makers to back away a bit,” Varathan of Capital Economics said. “They won’t want to overact and see the whole market crashing down.”
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