The International Monetary Fund (IMF) cautions that the residential property markets in East Asia are overheating and that by some measures, housing valuations are stretched.
IMF stressed in its latest Global Financial Stability report (April 2010) that the housing prices, particularly at the high-end segment of the market, have rebounded quickly in Hong Kong, China, Singapore, and South Korea, as well as in New Zealand and Australia since the second half of 2009. In several markets, prices now exceed their 2008 peaks.
The rebound has been spurred mainly by “unprecedented policy measures to mitigate the impact of the global financial crisis and the ensuing return of risk appetite.”
As central banks worldwide have cut their policy rates, mortgage rates are now at historical lows.
Property loan growth has been revived and so has the proportion of property loans to total bank lending, which in Singapore was close to 80 percent in the last quarter of 2009 – the highest among the markets highlighted in the report. In percentage terms, the year-on-year property loan growth has rebounded most sharply in China.
In late 2008, governments in Korea and China introduced housing-related tax breaks to help boost their real estate markets.
Property price increases were further fuelled by capital inflows, particularly in Singapore and Hong Kong.
In Singapore, foreigners and companies comprised 12.5 percent of home purchases in Q3 2009, compared with eight percent in the previous quarter.
IMF warned that by some measures, housing valuations are stretched. In several markets – notably, Hong Kong, China, Korea and Singapore – price-to-rent ratios are “elevated”, although the average price-to-income ratio has increased modestly. Many buyers have been purchasing “in the expectation of price appreciation, rather than simply for dwelling purposes,” it added.
According to the IMF, the booming property markets in the region may pose risks to the financial stability in the future. Banks are “increasingly vulnerable” to a price correction. In addition, “the widely anticipated rate hikes in the region will increase the burden on household balance sheets,” as most mortgage loans in Asian economies carry floating rates.
The Fund acknowledges that governments in the region have taken measures to cool the property market, including increased land supply, tighter requirements on mortgage lending, and the re-imposition of higher transaction taxes, such as stamp duties.
In Hong Kong, new mortgage loans’ average loan-to-value ratio has dropped significantly from its June 2009 peak, and banks in mainland China have started tightening their mortgage criteria. In response to such measures, the growth rates of transaction values have declined, including in Singapore.
However, the cooling measures’ full effects “are still to be seen in the coming quarters,” said IMF. The governments may have to polish their policies “to maintain a delicate balance between leaning against housing bubbles and ensuring a solid economic recovery,” it added.