The International Monetary Fund warns that residential real estate markets in East Asia are overheating and that by some measures, valuations are stretched.
In its just-released Global Financial Stability report (April 2010), the IMF notes that since the second half of 2009, housing prices – especially at the high-end of the market – have rebounded quickly in China, Hong Kong, South Korea, and Singapore as well as Australia and New Zealand. In many markets, prices now exceed their 2008 peaks.
The rebound has been mainly driven by ‘unprecedented policy measures to mitigate the impact of the global financial crisis and the ensuing return of risk appetite’.
# Mortgage rates are at historical lows as central banks around the globe have cut policy rates.
# Real estate loan growth has been revived. So has the proportion of real estate loans to total bank lending, which in Singapore was close to 80 per cent in Q4 2009. This is the highest among the markets highlighted in the report. In percentage terms, year-on- year, the real estate loan growth has picked up most sharply in China.
# Governments in China and Korea introduced housing-related tax breaks in late 2008 to help boost their property markets.
# Capital inflows have further fuelled property price increases, particularly in Hong Kong and Singapore.
In Singapore, foreigners and companies accounted for 12.5 per cent of the third-quarter home purchases in 2009, compared with 8 per cent in the previous quarter.
The Fund cautions that by some measures, housing valuations are stretched. Although the average price-to-income ratio has risen modestly, in some markets – notably, China, Hong Kong, Singapore and Korea – price-to-rent ratios are ‘elevated’. It adds that many purchasers have been buying ‘in the expectation of price appreciation, rather than simply for dwelling purposes’.
The region’s booming real estate markets may pose risks to financial stability in the future, according to the IMF. Banks are ‘increasingly vulnerable’ to a price correction. Moreover, as most mortgage loans in Asian economies carry floating rates, ‘the widely anticipated rate hikes in the region will increase the burden on household balance sheets’.
The Fund acknowledges that governments in the region have taken measures to cool real estate markets, including tighter requirements on mortgage lending, increased land supply, and the reimposition of higher transaction taxes, such as stamp duties.
In Hong Kong, the average loan-to-value ratio of new mortgage loans has dropped significantly from its peak in June 2009, and banks in mainland China have started to tighten their mortgage criteria. In response to such measures, the growth rates of transaction values have declined, including in Singapore.
However, the full effects of the cooling measures ‘are still to be seen in the coming quarters’, says the Fund. It also suggests that governments may need to fine-tune their policies ‘to maintain a delicate balance between leaning against housing bubbles and ensuring a solid economic recovery’.
Source: Business Times, 22 Apr 2010
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