Published October 14, 2008

Property can still bruise Asia's banks, economy

Half the wealth of Malaysia, Singapore, South Korea, India tied to property

(HONG KONG) Asian banks have largely escaped the worst of the global debt crisis but housing market downturns, especially in China and India, still threaten to pile up bad loans and slow the region's economy.

After property crashes burnt Japanese and South-east Asian lenders in the 1990s, they have been more cautious. So falling home prices are much less of a risk than in the United States, where the sub-prime mortgage meltdown brought down several leading banks.

Asian banks tend to limit loans to 70 per cent of home prices, compared to between 80 per cent and full value in the West. And few mortgages are securitised, let alone twisted into the kind of complex investment packages that went toxic as US homeowners defaulted.

But just as in the US and Europe, property booms in Asia are turning to slowdowns, and even busts. With half the wealth of Malaysia, Singapore, South Korea and India tied to property, according to CLSA, the potential impact on banks and economies is wide.

'There'll be a drag on economies,' said Leland Sun, founder of Hong Kong-based Pan Asian Mortgage Company Ltd.

The Asian Development Bank (ADB) cut its 2009 economic growth forecast for Asia to 7.8 per cent in mid-September from 7.2 per cent, but the global financial crisis has deepened since.

After strong run-ups, Hong Kong and Singapore home prices are widely tipped to fall 15 per cent next year as job cuts hit Asia's main financial centres.

In South Korea, unsold homes are at a record high, prices are falling and small construction firms are vulnerable. India's property boom fizzled into a price drop of a third this year in some cities, and analysts expect the same in 2009.

But the biggest risk of property loan defaults is in China. Developers are slashing prices to stem a sales slump, and dragging the whole market. As in the US, homeowners could flee if they owe banks more than their property is worth.

'People are very mobile and hard to find,' said Mr Sun, whose firm sponsors mortgage securitisation. 'It'll be a real issue.'

Ironically, many of the property industry's woes stem from Beijing's efforts to cool the market and fend off a crash, by a clampdown on loans to developers and rules to deter speculation.

A perfect storm swelled up. Home sales plummeted, first in overheated Guangzhou and Shenzhen in the south, then elsewhere.

In response, China's biggest property firm, China Vanke, dropped prices by a fifth at projects in Hangzhou and Shanghai and other developers have gone further.

Reflecting the problems, bonds from firms including Shimao Property have slumped on concerns over possible default, as credit ratings agencies downgraded them. Chinese developers sold over US$3.6 billion worth of bonds to international investors in 2006 and 2007, according to Thomson Reuters data.

In India, similar events are unfolding, with local media reports saying that banks are tightening lending for property after total credit grew 26 per cent this year.

Axis Bank, Yes Bank and HDFC Bank have the biggest exposure to developers, at around 12 per cent of loans. And just over a quarter of loans at ICICI Bank are residential mortgages.

'Developers are in trouble in India and China because they took on high gearing to expand land banks,' said Aaron Fischer, Asia property analyst at CLSA. 'You'll see some bankcruptcies.'

The situation is so dire in China that economists expect the government to back pedal, and fast, fearing the ruin of a property industry that accounts for a quarter of total investment and 10 per cent of gross domestic product (GDP).

Local authorities have already stepped in, with Nanjing promising homebuyers a subsidy and letting developers delay payments for land.

The Chinese government needs to bolster public confidence that after a correction of say 30 per cent, property prices will fall no further, said Ting Lu, China economist at Merrill Lynch.

'It's a serious risk to China's economic growth,' he said. 'A year ago, China needed to tighten policies to ensure safety of the banking system and to bring down inflation. But who could have expected a global financial crisis like this?'

But as long as mortgages are new to Asia, around for only a decade in some countries, they present less of a risk than in the West.

Home loans represented only 19 per cent of GDP in Japan, 12 per cent in China and 5 per cent in India, according to CLSA figures for 2007. In the US, the ratio is 105 per cent.

Developers in China and Vietnam described how homebuyers will turn up at sales offices with sacks of dog-eared bank notes.

In China, for example, new mortgage lending accounted for only a third of the US$300 million of new home sales in 2007.

But Chinese banks have been slip-shod in their lending practices, said Pan Asian's Mr Sun.

At nearly US$800 billion, loans to homebuyers and developers have jumped to 18.3 per cent of the total at Chinese commercial banks from 13.5 per cent in 2005.

Bad loans in the banking system stand at 5.6 per cent of the total, but economists cited anecdotal evidence that defaults on property loans are creeping up. -- Reuters