Asian Residential character Buyers Beware!

Asian Residential character Buyers Beware!

Asia’s real estate markets seem, on the surface, to have recovered from the Asian crisis and to be back on their feet. strong price and rental rises are reported in the media. Real estate developers are competing for ad space. New projects and launches are everywhere. Residential character appears to be having a blast.

The housing markets of both Thailand and Hong have seen strong rises over the past two years (though both are weaker now).

In the Philippines condominium prices rose 10.9% in 2005, and 8.5% in early 2006.

Indonesia seems set for another strong year, with house price rises of more than 7%.

Singapore is picking up steam, as is South Korea. Only Malaysia’s housing market nevertheless appears anemic, with a insignificant 2% price rise this year.

Not for real

But is this rosy picture for real? When modificated for inflation, the picture changes remarkably.

Indonesia, for example, is having a difficult time battling inflation. Pushed by rising global oil prices, Indonesia’s consumer price index rose 10.5% in 2005, and is expected to rise 14.2% in 2006. Corrected for inflation, Indonesia’s house prices truly fell 8.4% in 2005 and 7% y-o-y during 2Q 2006.

This year’s mild moderate price fall in Hong Kong (3.7%) is amplified by considering inflation. abodes prices have truly fallen by 6% in real terms.

The (modest) apparent price rises in South Korea, Singapore and the Philippines truly become price falls, or are greatly moderated, once inflation is factored in.

The Philippines’ recovery is pushed back by a year, and after adjustment for inflation, is seen to have begun only in 2005. Malaysia’s apparent mild price increases of 2004 and 2005 are found to be illusory, because in real terms, Malaysian house prices have been falling.

nevertheless below pre-Asian Crisis levels

All across the vicinity, character prices are nevertheless below pre-crisis levels, except for Thailand.

Philippines: 55% below peak

The Philippines has experienced the biggest drop in character prices among the economies affected by the crisis. A speculative bubble formed in the 1990s in the Philippines’ character sector, after financial liberalization and economic reforms had attracted capital inflows. Luxury condominium prices rose 63% (46% in real terms) between 1995 and 1997.

With the Asian crisis, Philippine luxury condominium prices dropped 18% (25.3% in real terms) from 1997 to 1998. Political crises led to further decline of the real estate market, till a mild recovery began in 2004. Luxury condominium prices in the Philippines dropped 56.2% in real terms (34.36% moderate) between 1997 and 2004. With minimal real gains in 2005 and 2006, character prices are nevertheless 50% to 55% below their 1995 peak in real terms.

Indonesia: 50% below peak

character prices in Indonesia were already declining well before the Asian crisis. True, they increased by 3% to 4% between 1996 and 1998 in moderate terms, but this was illusory, because inflation was on average 18% per annum from 1994 to 1998 (peaking at 88.4% in Sept 1998).

So in real terms the residential character price index has suffered an almost continuous decline in real terms since 1994, dramatically accelerating from 1998 to 1999. By 1999, the all new houses price index was about 50% lower than its 1994 level.

Thailand: 10% below peak

Correcting for inflation Thailand’s house prices peaked in 1992, and today’s prices are nevertheless 10% below the 1992 level. This is largely because, contrary to popular belief, house prices in Thailand were not rising pre-crisis. Indeed the mid 1990s truly saw a mild decline, in real terms. That decline accelerated after the Asian crisis, and house prices fell 18% from 1998 to 1999.

Thailand’s house price index quickly recovered post-crisis. It rose 53.8% (29.3% in real terms) from 1999 to 2006 thanks to strong economic growth.

However, all is not well in the political arena. As political pressure built up for chief Minister Thaksin to resign leading to the September 2006 coup, the house price index fell 1.7% (3.5% in real terms) in 2Q 2006 over the past quarter.

Malaysia: 10% below peak

With strong economic growth and huge export earnings, character was hot in Malaysia in the early 1990s. With two particular peaks – in 1991, when a 26% (20.3% in real terms) y-o-y real price growth was achieved, and in 1995 with an 18% (14.5% real terms) real price growth.

When the Asian Crisis hit Malaysia, house prices fell 11.7% (18.8% in real terms) between 1997 and 1999. With a price increase of 22.6% (10.7% in real terms) from 1999 to 2005, house prices in Malaysia are nevertheless 10% below their peak pre-crisis level in real terms.

Hong Kong: 61% below peak

Hong Kong character prices, as of 2Q 2006, are nevertheless 42% below their 1997 peak level, despite the meaningful recovery of the past two years. The collapse of the Thai baht came 24 hours after the handover of Hong Kong from UK to China. The Asian crisis combined with the bursting of pre-handover speculative bubble caused a 44.7% price decline from October 1997 to 1998. From 1997 to 2003, Hong Kong residential character prices fell by no less than 66% in moderate terms (61% in real terms due to deflation).

Tung Chee Hwa’s potential (or threat?) to supply 85,000 new flats yearly from 1998 onwards is widely believed to have depressed housing prices in the wake of the Asian Crisis.

later events exacerbated the crisis:

1.) the global economic slowdown in 2001; and

2.) the sudden increase of SARS virus in early 2003.

The strong price increases in 2004 and 2005 in Hong Kong can be credited to a partly political decision. Mortgage interest rates paid by Hong Kong borrowers have fallen from 11% in the post-crash ecosystem of 1998, to under 3% at their lowest point from 2003 to mid-2005. The fall in mortgage rates was considerably larger than that made possible by the fall in US rates.

The causes were threefold:

  1. the elimination of the Interest Rate Rules of the Hong Kong Association of edges (popularly known as the “banking cartel”);
  2. measures taken by the Hong Kong Monetary Authority to relax market entry criteria; and
  3. the formation of the Hong Kong Mortgage Corporation (HKMC), which allowed edges to offload parts of their mortgage portfolio to the HKMC and securitize the rest.

In early 1998, the mortgage rate was priced at chief market interest rate plus 1.25%. Now it is priced at around chief minus 2.375%. The mortgage rate is consequently 3.75% percentage points lower as a consequence of the change in the pricing practice of the edges.

Singapore: 37% below peak

With economic stability and increased purchasing strength, the immense need for housing in Singapore led to rapid increases in house prices in the 1980s to 1990s. From 1986 to 1996, the private residential price index rose by about 440%.

The government then stepped in to curb character speculation.

In 1996 there was an intense campaign against character speculation. The government also began to liberalize housing financing policy in a very meaningful manner, encouraging the public to buy HDB flats. These measures, combined with the Asian crisis, led to 45% fall in house prices in just two years (1996-1998).

Singapore slightly recovered from 1998 to 2000, but global events plunged it back in crisis. character prices in 2005 were at the same level as in 1994. In 2006, character prices are 32.7 % (36.9% in real terms) below their 1996 peak.

South Korea: 38% below peak

House prices in South Korea started recovering from the Asian crisis in 2001. The housing index registered price rises of 9.9% (6.5% in real terms) in 2001, 16.4% (12.2% real terms) in 2002, and 5.7% (2.2% real terms) in 2003.

However, left-of-center president Roh Moo-hyun felt that house prices are rising too fast. To combat ‘character speculation’, he increased capital gains taxes, tightened regulations, and used a large number of persuasive measures. In 2004, house prices fell by 2% (5% in real terms). In 2006, character prices were 38% below their 1991 peak in real terms.

The subsidy size

How much have political developments affected house prices? Certainly, the ouster of Suharto and Estrada (see “Politics — the bane of Asia?”) were accompanied by substantial economic disruption, which impacted the character markets to a meaningful extent. And in Thailand, the recovery of the real estate market is now being threatened by the current political crisis.

In Hong Kong, Singapore and South Korea, although they are bastions of free enterprise, they are also examples of enormous government intervention in the housing sector, on a extent unknown outside the former Soviet block. This intervention itself is a kind of political interference in economics, and has negatively impacted free-market house prices.

About 31% of Hong Kong’s population lives in public rental housing estates, one of the highest rates in the world. An additional 433,000 or 32% of the 1.34 million private residential units have been sold at discounted prices under the government’s various subsidized home ownership schemes, while 12% of the population lives in private rental housing (owner occupancy is at 57%). There are around 94,000 applications on the Waiting List of public rental housing (PRH) units with an average waiting time of two years. There are around 720,300 PRH units.

In Singapore, the post 1985 encouragement of HDB housing purchases, and the government’s campaign against character speculation, arguably were major causes of the pre-Asian crisis character slowdown. Since independence a major government goal has been to promote home-ownership. 85% of the population lives in flats constructed by the programs of the Housing and Development Board [] (HDB). Owner occupancy is now at 92%. In addition, about 7% of households live in public housing.

In South Korea, government intervention has recently strongly depressed house prices. South Korea has one of the most complicate public housing systems in the world. It is designed to be based on private investment, but the complete course of action – from site planning to the sale of completed houses – has to be approved by the proper authorities. Past and present Korean governments have introduced enormous housing programs to increase the housing supply.

From 1990 to 2004, around 560,000 housing units in South Korea were constructed yearly by the government. With this, the ratio of housing units to households increased from 72.4% in 1990 to 102.2% in 2003. Direct price controls and strong anti-speculation measure were imposed, exerting downward pressure on prices.

Malaysia is following a similar path, increasing housing supply and providing subsidies. Government policies in these countries have significantly impacted the market.

In all these situations, the action the government has taken with respect to subsidized housing has tended to depress character prices.

Conclusion: No real estate expansion in Asia

Asia’s housing markets are on the road to recovery. But in contrast to the spectacular house price booms in other places in the world, the housing expansion in Thailand and the Philippines is a construction expansion. Europe, the US, Australia, and New Zealand have seen real estate booms — prolonged above inflation increases in house prices. Asia has experienced in contrast a very substantial real decline in house prices over the same period.

This may be partly because in Asia there are few limits on new construction, while in most developed countries new construction is much more firmly constrained by regulations.

This construction expansion brings its own dangers (though it may be early days to speak of such dangers). If supply rises faster than need, prices will start falling and an overhang of unoccupied units will pile up. already before the onset of the Asian Crisis, there was an oversupply of luxury units in Bangkok, Jakarta, the Klang Valley (Malaysia) and Makati (Philippines). The recent surge of construction in Asia, against the background of minimal real price increases and continued political uncertainty, indicates that the recovery may be short-lived.

But what can countries do about this? Increased need from foreigners could help. Some Asian economies are trying to invite retirees. However, in addition to sun, sea, and fun, retirees look for peace and stability. Tanks rolling into the capital are not enticing.

For a land scarce city-state like Singapore, a restriction on foreign land ownership is understandable. But for land-high countries like the Philippines and Indonesia, it seems questionable.

Foreign ownership of character in Thailand, Indonesia, Malaysia and the Philippines is nevertheless unprotected to many restrictions and regulations. Arguably, Asia’s economies would assistance if these restrictions were phased out.

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