March 26, 2012
Real estate prices for private residential properties in Asia (ex-Japan) were resilient during most of 2011 despite slowing economic growth, higher interest rates and a few rounds of administrative tightening. The resilience reflects strong underlying demand for private housing in many countries and high household savings rates. Nevertheless, some markets are especially exposed to global downside risks in 2012, reminiscent of the 2008-09 downturn.
We take a look at the 2007-09 cycle to see which countries witnessed sharper corrections back then. Singapore and Hong Kong stood out in this regard. Private residential property price cycles in these two countries tend to have larger swings in both upturns and downturns. This could be due to the fact that both are land-scarce countries and property transactions are more liquid, coupled with an amplified business cycle in general. In both countries, the price increase during the 2007 upturn was as high as around 30% yoy. On the flipside, the downturn in 2009 was more severe in Singapore where private home prices tumbled 25% yoy in Q2 2009. Hong Kong saw a smaller but still steep decline of 14% yoy in Q1 2009.
In China, the trend in residential house prices varied from city to city. In Shanghai, growth in the price index peaked at around 10% yoy in Q4 2007 and the correction was relatively small at -2% yoy in Q1 2009. However, the swing was bigger in other cities such as Shenzhen where home prices grew 20% yoy in Q3 2007 and fell around -15% in Q2 2009.
In other major markets price corrections in the 2007-09 cycle were relatively mild. Taipei’s index fell -6% yoy while Korea’s index fell -1% yoy during their worst quarter in 2009.
In the current cycle, the upturn in 2010-11 was similar to the 2007-08 upturn. Again, Singapore saw the highest jump in home prices at 38% yoy in Q2 2010, but the increase had slowed to 8.5% yoy as of Q3 2011. Hong Kong’s home prices rose 31% yoy in Q1 2010 but slowed to 19% yoy in Q3 2011. Other markets which saw a good run include Taiwan where Taipei’s residential index rose 17% yoy in Q1 2010 before moderating, and Malaysia, which – while slower to take off – saw a 11% yoy rise in Q2 2011. South Korea’s home price index was also a late joiner, rising 7% yoy in Q3 2011 after modest growth in 2010.
China’s key cities have already started to see a contraction in private home prices on a year-on-year and month-on-month basis. Again, the contraction has been mild, with the Beijing and Tianjin markets losing around -2% yoy, for instance. Shanghai, Shenzhen and Guangzhou home prices have continued to rise on a yoy basis but showed a mild contraction on a mom basis during the past few months. In some 2nd tier cities such as Hangzhou and Wenzhou, home prices already fell more steeply in recent months, down -4% yoy and -11% yoy, respectively.
Putting together past cyclical behaviour, recent developments and potential global risks in 2012, Singapore and Hong Kong appear most vulnerable to a steeper correction if global downside risks materialise. In the same context, home prices in key cities in China, Taiwan, South Korea and perhaps even Malaysia could drop on a yoy basis, too. The extent of the correction in these markets is, however, likely to be milder compared to Singapore and Hong Kong.
Property correction impact on banking sector expected to be manageable in key countries
When looking at the significant portion of property-related loans in some Asian countries’ banks portfolios, there is valid concern over the impact of a potential sharp correction in the property market. Singapore, Hong Kong and China have high shares of property loans relative to total loans. In Singapore, housing and property-related loans account for almost one-third of total loans. In Hong Kong, loans for property development and investment account for more than one-quarter of total domestic loans (26%). In China, it is estimated that around 20-25% of total loans are property-related (mortgages and loans to developers).
Despite the significant portion of property loans in the banks’ total loans books, we expect the mortgage portion to be resilient even in a sharp correction scenario, due to the high share of owner-occupied units and traditionally low mortgage default ratios. During the 2008-09 property correction, residential mortgage delinquency ratios in Hong Kong stayed below 0.1%. Similarly, in Singapore household and bridging loans’ NPL peaked at 1% in Q2 2009. In China, the share of real-estate-related NPLs in total NPLs (official data) was 12% in 2008 but subsequently moderated to 10% in 2009-10.
Loans to developers are more vulnerable to quality deterioration in a downside scenario, but we think that banking sectors in these key countries will be able to withstand the potential rise in NPLs. China, Hong Kong and Singapore all enjoy a strong ability and willingness of the state to support the banking sector. In the event of higher NPLs, even double or triple current low levels, capital support should not be a problem for the state. Thus, the most likely impact for banks would be a hit on the bottomline due to higher write-offs and provisions.
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