November 25, 2010
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SINGAPORE, Nov 25 — Asia’s property markets are set for a continuous drip feed of tighter regulations in coming months as authorities try to take the froth out of surging home prices without triggering a crash.
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Last week Hong Kong announced its fifth set of measures this year as it struggles to curb speculation in its property markets. China, Singapore, Taiwan, Thailand and Malaysia have also unveiled more stringent regulations in recent months.
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But Asian investors’ appetite for property seems far from sated with prices continuing to climb. That will likely prompt governments to raise mortgage requirements again, increase land supply and — in the case of China — impose property taxes.
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“My baseline scenario is we will need more measures — the current set worked but their impact is transitory,” said Tim Condon, head of research at ING Financial Markets in Singapore.
Authorities’ ability to curb speculation is hindered this time round by the abundant liquidity in the market and central banks’ reluctance to raise interest rates too fast amid a patchy global economic recovery.
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Many investors, particularly at the luxury end, are coming to the market flush with cash, meaning measures such as putting a cap on mortgages relative to the value of a property aren’t as effective as usual.
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Hong Kong luxury home prices are now above the peak they reached in 1997 before the Asian financial crisis struck, fuelled in part by rich mainland Chinese buying flats in the city.
Newspapers in Singapore report of stories showing new condo developments selling all of their flats on the first day of asking.
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“We’re entering into unchartered waters because just one set of the measures introduced so far this year would have worked in previous times — but what we have right now are markets filled with liquidity and historically lower interest rates,” said Donald Han, vice chairman at Cushman & Wakefield in Singapore.
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Residential prices in Hong Kong climbed 25 per cent from mid-2009 to mid-2010 while those in Singapore rose 37 per cent, according to property agency Knight Frank.
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Asian policymakers know the dangers of property bubbles all too well. The 1997 financial crisis began in Thailand’s real estate markets and led to a crash in property prices across the region, while the US subprime mortgage meltdown and ensuing financial market chaos dragged much of Asia into recession.
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In the aftermath of the 1997/98 crisis Asian authorities led the way in designing “macro-prudential measures” to curb credit growth for housing long before the term became the buzzword of regulators in the west.
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These included the use of loan-to-value ratios to cut the size of mortgages people could borrow compared to the value of their house, and limits on foreign currency borrowing.
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But despite this experience observers say authorities are still struggling to keep up with pace of the price rises this time round.
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“They’d like to think they have learnt the lessons of previous crises but the way the price rises have gone over the last 18 months or so show that even in a command economy such as China you can’t always control prices as much as you’d like to,” said David Green-Morgan, head of Asia Pacific research at DTZ in Sydney.
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“In hindsight, the authorities should have started releasing more land for construction in 2008 but that was during the global financial crisis when it wouldn’t have been an obvious policy choice,” he added.
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Using regulation to control property prices is notoriously tricky because of the spillover effects such moves can have on the rest of the economy.
Federal Reserve Chairman Ben Bernanke argued against measures to rein in the US property market in the years preceding the 2008-09 financial crisis, saying it could have a negative impact on the rest of the economy.
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It is not hard to see why many economists now argue that was the wrong approach, but Asian authorities are still likely to tread carefully.
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“If China is aiming for around 10 per cent annual GDP growth, a big part of that depends on a healthy property market,” said Han at Cushman & Wakefield.
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“So rather than taking a sledge-hammer to the market governments will be issuing new measures on a bi-monthly or quarterly basis to weed out excessive speculation,” he said.
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So what measures should investors expect and where?
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Singapore, Hong Kong, Taipei and various cities across China are highlighted as the areas still most vulnerable to a build up of pricing pressures.
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Hong Kong has already gone in hard and is now expected to give its latest measures some time to take effect before going back for more sometime next year.
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Singapore has hinted that it’s likely to implement further measures, and is likely to release more land into the market as well as introduce more measures that curb speculation such as higher rates of stamp duty for people who sell properties soon after purchasing them.
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“Those who are buying multiple properties, those who are buying for investment, are the investors who are on a higher risk of facing more regulatory measures,” said Cushman & Wakefield’s Han.
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China faces an even tougher policy balancing act due to the huge regional disparities across its property markets.
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An analysis by Standard Chartered shows that cities such as Shanghai, Shenzhen and Chengdu are still facing huge upward pressure on prices while some “second tier” towns such as Dalian and Tianjin could see home prices fall as a host of new supply comes on to their markets.
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This means authorities are expected to roll-out property taxes they’ve been recently piloting in cities where the markets are still frothy, while refraining from any fresh measures elsewhere. That, though, is likely to be easier said than done when authorities are still struggling to keep up with what’s actually happening in the markets they’re trying to control.
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“Introducing such a tax is strewn with technical and political difficulties,” said Standard Chartered’s head of China research Stephen Green in a recent research note. A recent property tax proposal by Shanghai was reportedly turned down by the State Council because Shanghai had not done an adequate survey of all the apartments involved, a task that would take months, if not years, he added.
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Authorities are still expected to press ahead with these taxes but at a fairly low level, setting progressive rates of between 0.3 to 0.6 per cent of market value per year.
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But the bottom line though is that while most Asian property markets have managed exchange rate regimes and relatively low interest rates, authorities will struggle to control the market via regulation alone.
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“Until and unless you fix the undervaluation of currencies the pressure is always going to be there — in that sense, these property measures will only deal with the symptom and not the cause,” said ING’s Condon. — Reuters
