Region's property boom takes hammering

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From Mumbai to Melbourne, the Asia-Pacific 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 pull-back," said Rod Cornish, head of real estate strategy at Macquarie Capital Advisers in Sydney.

"It's a required pull-back 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 jeopardising 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 United States, where housing markets remain weak almost three years after the collapse of Lehman Brothers Holdings.

Home prices in 20 US 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 nations hit worst by the global recession, fell 1 per cent in April from March and have now tumbled 40 per cent since peaking in 2007.

"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.

"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 per cent this year, compared with 1.6 per cent in the euro region and 2.8 per cent in the US, according to International Monetary Fund projections. The IMF expects China's economy to expand 9.6 per cent this year.

A record US$2.7 trillion ($3.3 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 per cent in the first five months of the year, up from 25.4 per cent in January-through-April.

Chinese Premier Wen Jiabao said on May 1 that the nation was "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 alsorestricted 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 would not 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 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.

The credit company said property sales might start to slow as the Government's policy "starts to bite", leading to price cuts that could drive home prices 10 per cent lower in the next 12 months.

China's central bank this week increased banks' reserve requirements to drain cash from the economy after consumer prices rose 5.5 per cent in May, the biggest gain since 2008.

The national statistics bureau is scheduled to report May's home-price data on June 18.

Hong Kong, which Savills 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 per cent 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 home prices were "quite frightening" as growing wealth in China fuelled increases of 2 per cent a month.

HSBC Holdings and other lenders raised mortgage rates in Hong Kong after the central bank in April warned of a "credit-fuelled property bubble".

Hong Kong home prices could fall as much as 20 per cent next year because of higher mortgage rates, according to Barclays Capital Asia.

The Hong Kong Monetary Authority has tightened mortgage lending rules four times since October 2009, most recently on June 10 in raising down payments for homes costing more than HK$6 million ($951,819) and increased deposits for foreign buyers.

HKMA chief executive Norman Chan said Government-introduced property curbs had 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) in Singapore.

"Gains in property markets around the region have slowed but they haven't decisively peaked."

In Singapore, where demand for private homes and mortgages has boosted earnings for companies including lender DBS Group Holdings and real-estate developer City Developments, measures to curb property speculation have resulted in slower price gains for six quarters in a row.

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 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 centres are aiming to achieve price stability rather than declines, Cornish said.

"They have an economy tied to China and rates tied to the US," Cornish said. "In Hong Kong, you'll see a more sizeable impact on prices when rates start to pick up in the US."

In India, where the central bank has raised rates 10 times since March last year, Mumbai home prices have fallen 20 per cent from last year's 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 per cent over the next two years, according to Liases Foras Real Estate Rating and Research.

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.

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. Still, an expected pick-up in inflation meant "there is still a tightening bias".

RBA Governor Glenn Stevens on June 15 reiterated that policy makers might need to raise interest rates at some stage.

Japan land values fell 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 per cent in the first quarter as builders sought bankruptcy protection or debt rescheduling, the Financial Supervisory Service said.

As a struggling US economy, European debt woes and a Japanese recession weigh on global growth, Asia's policy makers may be reluctant to impose more measures to dampen 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."

- Bloomberg