Policy makers in Asian nations are struggling to control property bubbles that are threatening to derail the fastest growing region in the world.
In China, home prices are increasing at a record rate even after authorities demanded higher deposits, limited second-home purchases and set price ceilings. In Hong Kong, a site that went on auction this month fetched the most since the market peaked in 1997. The same trend can also be seen in Taiwan and Singapore, as prices resist cooling measures.
“Governments allow the property bubble to get so big and then try to use administrative measures to keep out speculators,” said Andy Xie, former chief economist of Morgan Stanley for Asia-Pacific. “It creates the risk of a very hard landing. The right thing to do is raise interest rates.”
The booming home prices in Asia “pose risks to financial stability”, warned the International Monetary Fund. Asian governments are implementing market curbs instead of increasing interest rates, in an attempt to avoid a US-style property crash.
“The property bubbles in Asia right now are reminiscent of the US before the subprime crisis because they are both fuelled by debt when interest rates are too low,” said Xie.
Hong Kong has seen the first sign of a potential turn in the market when Henderson Land Development Co. announced the cancellation of sales of its 20 luxury apartments.
China has limited pre-sales by developers, increased minimum mortgage rates, controlled loans for third-home purchases and tightened down payment requirements for second-home purchases, while keeping interest rates steady.
The banking regulator in China said it sees surging credit risks in the country’s property market and warned of growing pressure from non-performing loans.
Property prices increased 12.4 percent last month from the previous year, compared with 12.7 percent growth in April. This indicates that price declines are not keeping pace with the decline in transactions. The value of sales last month slid 25 percent from April.
Analysts at JPMorgan Chase & Co lowered their profit estimates for Chinese developers by nine percent this year and 11 percent next year on a “substantial slowdown” in sales.
China Se Shang’s Property Index fell 28 percent this year, with 32 out of its 34 members observing declines. Hong Kong is speeding up land auctions, scrutinizing sales techniques of developers and may raise sales taxes on certain properties.
Singapore has banned interest-only mortgages for uncompleted homes and levied stamp duty of sellers on certain properties. It also intends to increase land supply for housing.
Taiwan’s financial regulator asked the banker’s association to restrict lending procedures, while two state-owned lenders have reduced the amount of loans for property investors and buyers of luxury houses, and increased mortgage loans. Interest rates in Taiwan have been low since February 2009.
“The regulatory measures are not aiming to crash the whole property market, they are aiming to cool the speculative end,” said Khiem Do, HK-based head of multi-asset strategy at Baring Asset Management (Asia) Ltd.
Home prices in Hong Kong have increased 40 percent from the start of 2009 due to interest rates at 20-year lows, purchases from affluent mainland Chinese and lagging supply growth. The city still faces the threat of a property bubble amid low interest rates and liquidity, said Norman Chan, CEO of the Hong Kong Monetary Authority.
Meanwhile, in Singapore, private residential sales increased to a nine-month high of 2,208 two months ago, said the Urban Redevelopment Authority. This shows the “resilience” of demand for new homes even after the government has implemented curbs, said Li Hiaw Ho, executive director of CB Richard Ellis Research.
The Singapore government said concerns over “excessive” asset-price inflation in Asia will emerge still. If asset prices correct sharply in China, it could pose “negative spillover” effects on regional economies, said Ravi Menon, permanent secretary of the Singapore trade ministry.