Property slump to worsen Asia slowdown

Source : Business Times - 23 Jan 2009

Activity in China, Korea cools fast as force of global financial crisis hits home

Slumping Asian property markets could intensify the region’s economic downturn this year, further undermining consumer and investor confidence and prompting homeowners to tighten spending.

Japan, Hong Kong, Singapore and New Zealand are already in recession, and data yesterday showed activity in regional powerhouses China and South Korea is rapidly cooling as the full force of the global financial crisis hits home.

Goldman Sachs sees economic growth in Asia excluding Japan falling to 4.4 per cent this year from an estimated 6.9 per cent in 2008, but says the risk is to the downside.

‘People are worried about losing their jobs and that the economy will get worse, so they are refraining from making very large investments,’ said Michael Spencer, Deutsche Bank’s Asia economist.

Half the wealth of Malaysia, Singapore, South Korea and India is tied to property, according to CLSA.

In Hong Kong and Singapore, double-digit declines in property prices last year and falling real interest rates have made apartments more affordable, and home prices are forecast to slide another 20-25 per cent this year as the global economy weakens.

Buyers, however, are thin on the ground as investors who lost heavily in Asian stock markets last year have less money to put down for property purchases. Worsening economic data across the region, meanwhile, is also discouraging people from committing to big investments like housing.

As homeowners see the value of their assets being eroded in tandem with the deteriorating economic climate, they become part of a vicious cycle, cutting back on consumption - which needs to grow significantly to offset declining Asian exports - and thereby accelerating the slowdown across the region.

Hong Kong homeowner Maggie Chan fears she will soon be strapped with negative equity on the HK$3 million (S$578,500) two-bedroom apartment she bought eight years ago, owing more on her mortgage than the property will be worth. ‘Property prices are going to go down and that’s making me think a lot more before I spend,’ she said.

As exports and domestic consumption weaken, HSBC forecasts a 0.6 per cent contraction in Asian GDP ex-China and Japan in the first quarter of 2009 from a year earlier, the region’s weakest performance since late 1998 during the Asian financial crisis.

Asia would typically lag a US economic downturn by two to three quarters, but is moving more in sync with the US cycle in this crisis, says Goldman Sachs. That’s partly because the credit crisis is making banks worldwide reluctant to lend, further depressing business activity and property sales.

‘Asian loan-to-deposit ratios are lower now than during the Asian financial crisis,’ said Michael Buchanan, Goldman Sachs’ Asian economist. In Hong Kong, banks are offering 70 per cent mortgages on just 85-90 per cent of the value of a property, says Colliers International.

Receding inflation is enabling Asian policymakers to slash interest rates aggressively but that may not be enough to stimulate demand.

South Korea has introduced measures to support its property market, including easing tax rates on luxury property, but Mr Spencer expects more action may be needed, such as cutting taxes on property transactions and capital gains.

In China, capital gains tax exemptions and reduced down-payment requirements, together with hefty discounts by developers, have boosted property sales though they are still well down on a year ago and supply overhang persists in cities like Beijing and Shenzhen, analysts say.