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Published November 12, 2009

Stronger action seen to deflate property bubbles


(MUMBAI/HONG KONG) Asia's policymakers are sticking with surgical steps to contain asset price inflation, but may soon have to turn to much more aggressive action if property bubbles keep inflating.
High risk: With luxury apartment prices rocketing 40% this year in Hong Kong, Legg Mason fund managers have gone from bullish to wary on property stocks

Authorities in Hong Kong, India, Singapore, South Korea and Taiwan in the last several weeks have either increased restrictions on property loans or issued warnings that tighter controls may be needed to contain a boom driven by a mixture of rock-bottom financing rates, rising wealth, government incentives and outright speculation.

Australia's central bank is trying to get ahead of the game. Hot housing markets may push the Reserve Bank of Australia to raise its policy rate in December for the third consecutive month, the first time that has happened in about 20 years.

'At the moment it's a fairly softly, softly approach to things but I guess if this continues and liquidity continues to be ample and continues to push up asset markets, and that's certainly our view, then the moves will become presumably more and more aggressive,' said Robert Prior-Wandesforde, senior Asia economist with HSBC in Singapore.

The more aggressive tactics could include increasing taxes on purchases of second homes, capping mortgage limits or even threats of higher interest rates.

The latter apparently worked for the Bank of Korea to cool its property boom. Like Hong Kong, India and China, South Korean authorities tinkered with mortgage rules, by raising the minimum standard for mortgage debt to income and cutting the maximum ratio of mortgage loans-to-property value.

Yet the central bank also used overt warnings - early on - that higher interest rates could be used to cap property prices. The BOK has not yet raised rates, but its all-in approach has resulted in mortgage lending slowing for a third straight month in October.

Asset price inflation will become increasingly a sore point for China's policymakers.

Bank of America-Merrill Lynch economists believe that China is going to take a cautious approach by maintaining stimulative policies for first-time home buyers, but tighten up rules for those purchasing a second home by increasing down payment requirements and adding to charges.

With real estate investment making up 10 per cent of GDP, the government will not want to deflate overall prices too quickly. The stakes, though, are high.

'There is a big chance this asset price inflation will become a bubble,' Mingchun Sun, chief China economist and head of China equity research with Nomura, said. 'If the government can control the amount of leverage in the purchase of assets, then the damage can be controlled at least.'

One irony of the last year is that the global credit crisis has resulted in a Chinese credit boom, as the government encouraged lending to support the economy. Banks in China are expected to lend 10 trillion yuan (S$2 trillion) this year.

Mr Sun expects mainland banks to lend another 10 trillion in both 2010 and 2011, which would double loans outstanding. And since 70 per cent of credit growth usually ends up in household financial assets, how these households spend and invest this wealth will be key for asset price inflation for years to come.

He is hopeful that the government can control bubble pressures by allowing development on more state-owned property. His top stock picks include China Resources Land and KWG Property Holding Ltd because they own big shares of land in the west, where many Beijing-led projects have yet to start.

A Reuters poll showed analysts expect monetary tightening to cool some of Asia's property markets next year. From now until the end of 2010, analysts expect residential property prices in Hong Kong to rise 8.8 per cent, and by only 2.5 per cent by the end of 2011.

Similarly in Singapore, house prices are seen up 7.5 per cent between now and the end of next year and then flat by the end of 2011. Interest rates in Hong Kong and Singapore generally track US funding costs, which are expected to begin rising in the latter part of next year.

The last time that the average policy rate in emerging Asia hit the end of an easing cycle was the second quarter 2004.

Five years later and housing prices are up single digits compared with the prior year.

Legg Mason fund managers have gone from bullish to wary on Hong Kong property stocks in the last three months.

With luxury apartment prices rocketing 40 per cent this year in Hong Kong, the US fund is neutral on the industry but remains bullish on mainland Chinese real estate. -- Reuters