Published December 17, 2009

Rising prices prompt bubble fears in Asia

Investors concerned a real estate bubble burst would derail the region's economic recovery

(HONG KONG) Property prices in parts of Asia have risen sharply, sparking worries that bubbles are forming and prompting policymakers to rein in the sector.

Investors fear any real estate bubble burst could derail the region's nascent economic recovery in the way the US housing sector slump brought on the worst global downturn in decades.

Here are some questions and answers on where potential bubbles are, their impact on shares, where prices are headed and policies that governments might implement next year:

Bubble threat: where does it loom largest?

China and Hong Kong face the highest risks in Asia, followed by Singapore, as property prices have risen strongly, especially in the second half, due to ample liquidity, low interest rates and a rally in stock markets.

'If it (the China bubble) does burst, is that going to suddenly be a big burst? In this case, it's got a big impact on the rest of Asia,' said Jeremy Helsby, group CEO of UK-based property firm Savills .

Some cities in China and Hong Kong's mass market have seen residential prices rise by about a third this year, while in Singapore, private home prices soared 16 per cent in the third quarter from the previous quarter, the biggest jump this decade.

'Singapore and Hong Kong are held up as examples of the effects of excess liquidity and credit in Asia. The residential property data certainly raise cause for concern,' said Alaistair Chan, an economist at Moody's

China's aggressive stimulus measures and developers halting some projects late last year due to the economic downturn helped push up prices this year, while Hong Kong's limited land, coupled with a government land sales hiatus boosted prices.

The bubble threat also surfaced in Australia and South Korea earlier this year though various government policies have allayed those fears.

What is the impact of potential bubbles on shares?

Property shares have been outpacing main indexes in China , Hong Kong and Singapore, with the sector sub-indices up by 70 per cent to more than doubling.

Shares of top Chinese developer China Overseas Land and Investment and Singapore's CapitaLand, South-east Asia's largest developer, have signifcantly outpaced their local market indexes.

While some real estate stocks are likely to continue to outperform the broad markets in 2010, gains will be muted due to wariness over governments' tightening policies as they act to fight off the potential of a property market meltdown.

'Next year, we won't see the exceptional returns we've seen in either financials or property shares. But I do think we will see some further but moderate growth in a number of property shares,' said Rod Cornish, division director at Macquarie Capital Advisors. If a bubble does burst, it could hamper developers and real estate agents exposed to the markets affected. For instance, if a bubble bursts in China, major developers in the market, such as Shimao Property , could see their earnings and share prices hurt, analysts said.

Where are property prices headed for next year?

Most of the huge price rises in Asia are in the residential sector as reluctance by companies to hire kept demand for office space relatively weak in the region.

Residential prices in most markets are set to stabilise next year, with rises seen gradual compared to the huge swings this year. Prices from Japan to Singapore are expected to either remain stable or rise by nearly 10 per cent.

Residential prices in China are expected to rise by as much as 5 per cent by the end of next year from now, a Reuters poll showed, less than gains logged for this year.

Comparatively, commercial prices will likely be steady or rise marginally in China, but might see a more significant increase in Singapore, analysts and industry executives say.

What kind of policies will governments come up with?

Some countries have already reacted with monetary and property-related policies to allay fears over speculation.

In December, Australia raised interest rates for a third straight time, while South Korea in September imposed mortgage lending in Seoul and nearby areas to stem a housing boom.

In the months ahead, governments in the rest of Asia will likely resort to releasing land supply, taxes and bank lending measures to stablise property prices, instead of using monetary tools, since inflation is still benign.

'Governments are nevertheless unlikely to crack down on speculation too harshly. One worry is that this could deter legitimate investment, causing the market to slump,' said Mr Chan at Moody's -- Reuters