Asian banks wary of property bubbles

Residential property prices are rising across much of Asia, prompting fears of a real estate bubble. Apartments are selling for staggering prices, and central banks and finance ministries have begun to rein in property-related stimulus measures.

Yet it seems only yesterday that prices were falling, giving rise to fears of a hard landing for property investors that could have destroyed huge amounts of personal wealth and delayed the recovery.

In Hong Kong, for example, prices for apartments costing more than HK$10m (US$1.3m, €880,000, £790,000) fell 6.2 per cent in the third quarter of last year, according to Savills Research, which feared that luxury prices might fall by a further 40-45 per cent by the end of this year.

As it turns out, luxury apartment prices in Hong Kong are now 30 per cent above their low point in the fourth quarter of 2008, with prices up 14 per cent just between the second and third quarter this year in favoured neighbourhoods. Similarly in Singapore, prices for private homes rose 15.8 per cent in the third quarter from the second, the first such rise in more than a year. In China, prices are up 37 per cent year-on-year.

So is Asia in the grip of a bubble or just enjoying a healthy reaction to excessive gloom and doom of the end of last year? No one really knows, but some governments and central banks are taking limited pre-emptive action just in case.

In Singapore, the government has shut down bank lending schemes that allowed buyers to defer mortgage payments on uncompleted developments, and hinted at land sales to increase supply. Tharman Shanmugaratnam, Singapore's finance minister, told the Financial Times that these measures appeared to be having some effect, but it was not clear whether further action was needed. "It is worth watching very carefully," he said.

South Korea's financial regulator has tightened rules on borrowing, and in Hong Kong the central bank has warned that low interest rates are not sustainable. It increased the required down-payment on homes costing more than HK$20m by a third, to 40 per cent.

However, no country other than Australia - gripped by a China-fuelled commodity boom - has taken the step of raising benchmark interest rates to cool demand. That reluctance reflects fears that higher rates could choke off domestic recovery and push up Asian currencies against the US dollar, harming trade prospects.

It also suggests central banks are not yet sufficiently sure that an asset price bubble is forming.

Jim Rogers, the Singapore-based international investor, said there were clearly hot spots but no general region-wide bubble.

"I would not think about buying in Hong Kong or Shanghai, but it is not so widespread that all of Asia is in some sort of property bubble," Mr Rogers told the FT. "It may happen . . . but I don't think it's happening now."

Some observers go further, asserting that the bubble is an illusion. Matt Nacard, Tuck Yin Soong and Eva Lee, property analysts at Macquarie Research, say price growth is likely to slow significantly next year because it has been largely a product of the stimulus measures introduced to fight off recession.

"Faced with few other investment options, investors have jumped into property as cash-filled banks have aggressively chased this relatively low-risk asset class," they wrote in a report on the outlook for property stocks. "This phenomenon has been so strong it has enticed usually wary investors to invest earlier in the recovery cycle."

Frederic Neumann, senior Asia economist at HSBC (LSE: HSBA.L - news) in Hong Kong, says policymakers will have to raise rates eventually from the extraordinarily low levels reached during the global financial crisis, but are right to hold their fire for now. "If left unaddressed, the current monetary set-up in Asia will ultimately blow a bubble of mind-boggling size, but so far the train has not left the station," Mr Neumann says.

He points out that the most spectacular price rises have been limited to pockets such as luxury flats in Hong Kong and the biggest Chinese cities, with increases for more mainstream properties remaining subdued. Even in China and Hong Kong, prices are well below the levels they would need to reach to match previous bubbles.

Outside Japan, Asia does appear to be experiencing a surge in credit relative to gross domestic product, which would normally be an advance warning of a bubble forming. With the exception of China, however, this is due to falls in GDP rather than a surge in bank lending for mortgages.

For now, says Mr Neumann, there is no evidence that Asia has entered bubble territory. But if central banks continue to keep interest rates at very low levels, the excess liquidity in the system is likely to lead there eventually.

Additional reporting by Robert Cookson in Hong Kong