Policymakers fear asset bubbles could put at risk fledgling economic recovery
(SINGAPORE) Asian policymakers, confronted with rising real-estate values in the region that threaten to mimic the US mortgage bubble that roiled the global economy, are stepping up efforts to rein in prices.
Regulators in South Korea, Hong Kong and Singapore told banks in recent weeks they need to tighten lending standards. Central banks, including those of India and South Korea, have signalled a readiness to raise interest rates in the coming months.
Officials are trying to apply a lesson US Federal Reserve chairman Ben Bernanke identified from the financial crisis that erupted in 2007: constrain 'excessive' leverage before it destabilises the economy. At risk is sustaining the economic expansion of the region leading the world out of recession.
'Asset bubbles are something that authorities have to contend with quickly and not let run away,' said Tai Hui, head of South-east Asian economic research at Standard Chartered in Singapore. 'Central banks are ready to take some of the wind out of the sails whether through interest rates or administrative measures.'
In Hong Kong, where mortgage rates are the lowest in at least 19 years, home prices have climbed 26 per cent this year, spurring authorities to tighten down-payment requirements for luxury homes. A one-bedroom, 816 square foot apartment in the city's Kowloon district last month sold for HK$24.5 million (S$4.3 million).
Hong Kong's index of finance stocks jumped 60 per cent this year, and the measure for property shares is up 67 per cent.
Singapore's private-residential developers sold 10,000 units in the first seven months of 2009, more than the 4,300 sold the whole of last year. In South Korea, bank lending to households expanded for a seventh straight month in August as home prices rose.
Stocks are also surging in some markets. China's Shanghai Composite Index is up 71 per cent so far this year, compared with the 25 per cent gain in the MSCI World Index, and benchmarks from Hong Kong, South Korea, Singapore and Taiwan are all up more than 50 per cent. By comparison, the US Standard & Poor's 500 Index has advanced 20 per cent.
The advance in asset prices is also reprising debate over whether to respond with interest rates, or tighter rules for financial companies to restrain credit growth. Analysts said a combination of approaches is likely.
'The challenge for the central banks is whether you want to raise interest rates because asset prices could' cause a relapse of what befell advanced economies, said Robert Subbaraman, chief economist for non-Japan Asia at Nomura International Ltd in Hong Kong. 'We're starting to see kinds of quasi-type monetary policy through regulating prudential measures to try to lean against a rapid rise in asset prices.'
Fed policymakers, who had previously judged that asset-price swings weren't a province for the central bank, abandoned that orthodoxy as the US mortgage collapse triggered US$1.6 trillion of credit losses and writedowns to date.
In Singapore, the government barred interest-only loans for some housing projects last month. It also stopped allowing developers to absorb interest payments for apartments that are still being built.
Hong Kong authorities last week limited buyers of homes costing more than HK$20 million to borrowing 60 per cent of the property's value, down from 70 per cent before. The Hong Kong Mortgage Corp, a government-backed home- loan insurer, suspended insurance for homes that aren't owner-occupied.
South Korea's financial regulator said on Oct 8 it plans to tighten regulations on non-banking finance companies' lending to households, and authorities have cut loan-to-value ratios in mortgages to 50 per cent from 60 per cent in some Seoul areas.
In the past month, China's five largest banks were told to increase write-offs against bad loans and maintain their capital adequacy.
Besides such administrative measures, Asia's central banks will need to 'put a tight watch on monetary policies' to prevent asset bubbles, the Asian Development Bank said last month.
Australia acted early this month, with a quarter point hike in the benchmark rate. Bank of Korea governor Lee Seong Tae said this month that rate rises may be bigger than the 'usual baby step' of 25 basis points. -- Bloomberg, Reuters
Source: Business Times, 28 Oct 2009