Property bubbles are forming in some of the key cities in Asia which may lead to a market correction, according to Mr. Piyush Gupta, chief executive officer of DBS.
In a speech at an event organized by the American Chamber of Commerce in Singapore, he stressed that more Asian governments may decide on raising their interest rates soon due to concerns over asset bubbles.
Prices of properties have been increasing across Asia. In fact, property prices in Hong Kong have returned to the peaks seen before last year’s crisis. DBS believes that asset bubbles have already formed in Singapore, HK and Shanghai.
It expects the possibility of a market correction but reckons that a crash is unlikely.
“You can’t time the correction because of the capital flows coming in from the west. Essentially at this stage, everything is liquidity-driven and there’s a large amount of liquidity which is keeping all asset prices propped up,” said Mr. Gupta.
“If there’s something which pulls some of the liquidity out, you’ll start seeing a correction. By and large, look at the corrections in the past; it won’t be different from those. So whether you’re off 10 percent to 15 percent and then correct and go back up is the type of correction that you’ll see. I don’t think you’ll see them falling off 30 to 40 percent.”
However, with governments having implemented cooling measures in the property market, or in the process of doing so, DBS expects interest rates to increase soon – between 100 and 125 basis points on average by the end of 2010.
“In all cases, the central banks are trying to be focused on measures like loan-to-value ratios, tightening of the margins to make sure they stay ahead of the curve. That’s one of the reasons why we think rates will go up this year,” he added.
“Malaysians have raised, Indians have raised and I think you’ll start to see China and Korea in the next few weeks. And then around the region you’ll start to see a bias for tightening and I think you’ll see more tightening than people expect.”
Several investment risks in the region were also noted by Mr. Gupta, citing the present political unrest in Thailand, which could likely affect the economic prospects in the country.
Mr. Gupta said: “Till a week ago, we were very bullish on Thailand. We thought that the current administration was doing a good job and that most of the market was calling Thailand on the downside. We frankly thought Thailand would surprise on the upside.”
“Obviously after the weekend, bets are off. What happened over the weekend, with the loss of lives and people injured is very unusual. This is not Thailand. I’m beginning to worry that this whole urban-rural divide is actually going to put a little bit of crimp on Thailand’s prospects.”
Mr. Gupta sees Indonesia as a market with huge potential for DBS’ business. However, he said that DBS had not conducted any negotiations to acquire Indonesia’s Bank Danamon.
As for Singapore, he expects to see steady earnings for lenders in H2 2010. He sees loan demand holding up heading into the second half.