Property bubble will have huge impact on regional economies

Property prices are rising throughout Asia and concerns are growing that a property bubble would have dire consequences on the banking sector and overall economies of countries in the region.

From India to Shanghai, and from Hong Kong to Singapore, prices are red hot. While economic growth, modernisation and urban migration is creating huge demand for residential properties, much of that is also due to money seeking higher returns in a low interest rate environment.

The leverage being taken on by households to purchase what many would say is the primal urge to own a home is growing in a number of countries but like all bubbles in history, there is a point to its elasticity.

StarBizWeek take a brief look at how some of the asset bubbles have affected some countries in the past and what are the current problems in the property sector.

Japan

The most extreme example of a stock market and real estate bubble in recent times has to be Japan.

During the 1980s, the Nikkei 225, which is the benchmark stock market indicator for the Japanese stock market, surged to a height of over 38,957 in December 1989. Its peak this century was 18,300 points and the index has been hovering around the 9,400-point level this week.

The consequence of the collapse of the Japanese stock market then was also felt in the Japanese property market, as both ran-up hand in hand during a time when exuberance was fuelled by low domestic interest rates and expectations of a “can’t lose” economic environment.

The bursting of the asset bubble in Japan led to what is now known as the lost decade. Banks, which were also flushed with cash because of the high savings rate of the Japanese, lent heavily for speculative purposes in the securities and properties industry and were bailed-out by the government when asset prices deflated.

In fact, the price of properties in Japan on average has not recovered anywhere close to what those properties were priced when the market started to unravel in 1990.

United States

The United States is no stranger to real estate booms and busts. In fact, those cycles tend to happen from state to state during different periods of time.

But the grand daddy of all boom and bust cycles took place between 2000 and 2005 when property prices surge beyond any fundamental justification.

The rising prices of property meant that banks started to seek more and more marginal quality buyers, which we all know today as subprime borrowers.

Those people with poorer credit history had financial deals that were above the odds compared with what the prime borrowers were dishing out for their real estate loans.

The lucrative real estate loan segment also saw the entry of non-banks that started lending money and packaging those subprime debt into collateralised debt obligations.

When property prices headed south, so did the repayment capability of those subprime homeowners. The collapse of the US housing market resulted in a global recession brought about by troubles banks that had to deal with a mountain of bad debt triggered by the housing market.

China

In the world’s second-largest economy and most populous country, a housing boom has truly been in the works for some time now. There have been intermittent corrections but the massive stimulus package by China’s government and the subsequent pick-up in economic and investment activity has resulted in skyrocketing prices once again.

Earlier in the week, China watcher and economist Andy Xie said the property market in China has peaked and is set for a 5-year bear market. Those who disagree say Xie’s comment does not take into account the measures taken by the authorities to cool the market and the high downpayments that are needed for property investments.

The general believe is that a boom in real estate in China has now morphed into a bubble. When the bubble ends, the scale in the number of properties being built and the build up in prices could not only have a serious impact on the country but for the rest of Asia and the world.

Hong Kong and Singapore

For city states like Hong Kong and Singapore, which are built on financial services, the marriage between money and property has been a symbiotic relationship that is uncommon in many other parts of Asia.

In Hong Kong, the percentage of a person’s pay packet that is used to pay for their mortgages are larger than what Malaysians are used to. But a combination of next-to-nothing interest rates, a booming economy, purchasers from foreigners especially mainland Chinese in Hong Kong have seen property prices in Hong Kong and Singapore not only recover from the bottoms reached during the 2008 global financial crisis but surged to new record highs.

The governments there are naturally worried. In fact, Hong Kong and Singapore have instituted curbs to cool down the deluge of money that is headed towards the property sector.

Their hope is that it should put the brakes on the property train in those countries but with people quite used to peaks and troughs in the price of property, the hope is that this bubble would not have a devastating impact on the large banking sectors of those jurisdictions. - By Jagdev Singh Sidhu (The Star)