The Coming Asian Housing Bubble Burst
Everyone knows the role played by housing bubbles in the
pre-crisis booms that ended in spectacular crashes in the United
States in 2008, as well as in other countries like the UK and
Ireland, and then Spain. But many commentators still persist in
seeing this as more of a developed economy problem, which is less
likely to become a concern in developing countries where excess
demand for housing remains an issue.
In fact, however, it is just as possible for debt-driven private
consumption bubbles to burst in developing countries – and several
developing country financial crises have resulted from precisely
that in the past. The experience of the Asian financial crisis in
1997-98, in which excess private indebtedness played a big role in
causing the crisis in South Korea and Thailand, had provided a
salutary lesson to most of developing Asia in the subsequent
decade.
So it could have been expected that allowing excessive private
credit expansion, especially for private retail credit for
housing, automobiles and other consumption, is something that
would be anathema to Asian countries, especially those that had
already gone through one round of devastating financial crises.
Yet, in the aftermath of the Great Recession of 2008, many Asian
developing countries actually encouraged the growth of consumer
credit bubbles as a means to more rapid recovery, accentuating a
process that had already been eased by financial liberalisation
from 1999 onwards.
HEAVY EXPLOSION
The result has been an explosion in heavily leveraged consumption
as well as in residential real estate activity, even in economies
where wage incomes have not increased that much, such as the
Republic of Korea. And the impact has been most strongly felt in
the housing market. From early 2009, as Charts 1 and 2 show,
residential prices in several Asian economies soared dramatically
for at least two years.
This has been most evident in Hong Kong, where house prices have
more than doubled since early 2009. In 2012, when global
residential real estate prices increased by around 4 per cent,
prices in Hong Kong rose by 24 per cent. It is now the most
expensive place on earth, with property prices significantly
higher than in New York, London or Shanghai. Of course, Hong Kong
house prices are substantially affected by non-resident purchases
(by mainland Chinese as well as expatriate westerners), so they do
not reflect the same internal factors that are shaping real estate
markets elsewhere in the region. That may be why house prices here
have continued to increase even when the rest of the East Asian
region shows signs of slowing down and why it has remained
impervious to various policy measures designed to cool the
overheated market.
By contrast, the authorities in China have been working to quell
the frothy housing market ever since early 2010, and to some
extent they seem to have succeeded, as average house prices have
remained largely flat for the past two years.
TAPERING OFF EFFECT
In some other countries in East Asia, house prices have tapered
off or even started declining, independent of any policy nudging,
but simply because the bubble has finally burst. This is clearly
evident for Taipei China and Malaysia (Chart 2), but even in South
Korea and Indonesia, the rate of increase has come down
significantly. As Chart 3 suggests, only in Hong Kong did the rate
of increase further accelerate. Elsewhere, even in places where
the prices continued to increase, they did so at a slower rate,
including in India’s Mumbai, where the rate of increase was still
quite high.
In fact, in the past year (as indicated in Chart 4) house prices
in Shanghai and Singapore increased less than the general rate of
inflation, so they declined in real terms. In other places like
Taipei, they barely increased in real terms. The indicators for
the first quarter of 2013 are that housing continues to increase
in prices across much of Asia, but at significantly slower rates,
and in some countries they have started declining.
But while the rapid increase in residential real estate prices
clearly suggested housing bubbles in many Asian countries, the
bursting of the bubble need not be good news, and can have painful
consequences. As in the US housing market before 2007, most of the
increase in real estate prices in these Asian economies was
debt-driven, resulting from the rapid expansion of retail credit
to households, which in turn dominated in total personal debt. As
Chart 5 shows, credit to the private sector increased dramatically
in many of these economies.
SUBSTANTIAL INCREASE
The most substantial increase has been in Hong Kong, which is
also home to the frothiest property market of them all. But all
the countries shown in Chart 5 have private credit to GDP ratios
in excess of 100 per cent, which has usually meant an inevitable
day of reckoning at some point, usually with unpleasant
implications. Indeed, the household sector is already facing
personal debt crises in several countries, notably South Korea,
Malaysia and Thailand. And this is turn is already acting as a
drag on the economy, as households that increasingly find it
difficult to service their debts are forced to deleverage and cut
consumption.
Chart 6 shows that household debt has very clearly reached crisis
levels in some economies. In Malaysia, total household debt in
2012 amounted to more than 80 per cent of GDP and a shocking 140
per cent of personal disposable income – clearly, therefore an
unsustainable level that will have to be reduced sooner or later.
In South Korea and Singapore, the corresponding ratios in 2012
were around 90 per cent and more than 100 per cent – once again
suggesting that this state of affairs is not likely to be able to
persist for long. In South Korea, total indebtedness of the
government, companies and households is currently 283 per cent –
significantly more than the 227 per cent that existed just prior
to the Asian Financial Crisis in 2007.
So this is a bubble – or rather, a set of bubbles – waiting to
burst. Indeed, some are already in the process of bursting. Debt
levels across the economy are rising beyond the ability of the
various debtors to service them. Housing debt is just one of the
problem areas. In the case of other forms of personal debt – such
as credit card debt, debt to finance purchases of vehicles and
student debt – there are similar and growing concerns about the
capacity of borrowers to repay.
As these factors cause consumer spending to slow down, this is
already affecting companies, and causing their debt to become more
difficult to service. The corporate bond market, which had become
incredibly buoyant in emerging Asia in the recent past, is also
becoming a cause for worry.
All this makes the East Asian region’s economies ever more
vulnerable to external shocks. But with these levels of
indebtedness, the shocks that cause the next round of damage may
even come from within.
This Piece First Appeared on Hindu
Business Line.
Posts
