The aggressive global policy response to defend against the slowdown has begun to gain traction, as real economic data have shown a slight improvement almost synchronously around the world. These attempts to revive growth have also resulted in a significant rise in asset markets, particularly property prices. Property markets have seen a meaningful rebound from the bottom across the Asia ex-Japan (AXJ) region, particularly in the financial centers of Hong Kong, Singapore, Seoul, Shanghai, Bangkok and Mumbai. From what we can surmise, property prices have risen by 10-40% in various pockets in the region (unfortunately, most up-to-date official national and city level property indices are not available). Hong Kong and Singapore, which are linked more closely to global financial markets, have seen the sharpest rebound. Price indices in some areas are close to the peak levels seen prior to the emergence of the global credit turmoil. Transaction volumes for the property sector have also increased significantly.
The most surprising trend can be seen in Singapore. Although Singapore is likely to suffer the worst recession in its history in 2009, property transactions are now close to their peak. During January-May 2009, total private residence transactions increased to 5,531 units (annualized run rate of ~13,247 units) versus the peak of 14,811 units in 2007.
Many Reasons for the Quick Rise in Property Prices
First, a sharp rebound in the stock market around the region appears to have increased the confidence of the locals. The MSCI Asia Ex-Japan Index (in USD terms) has risen by 71% from the trough following the global trend.
Second, excess liquidity in the system is rising. Central banks have cut rates aggressively in response to the global credit crunch, and the recent increase in capital inflows and trade surplus has added to this excess liquidity trend, as central banks appear reluctant to allow local currency appreciation in view of the still-weak external outlook. As a result, foreign exchange reserves in AXJ excluding China increased to US$1,446 billion as of May 2009 and are now close to their peak level of US$1,491 billion in April 2008. China’s foreign exchange reserves have also risen back to an all-time high of US$1,954 billion in March 2009 after declining to US$1,880 billion in October 2008. Banks have cut mortgage lending rates aggressively. Average short-term rates have declined to unusually low levels at 2% on account of the aggressive monetary policy response. M1 growth in the region accelerated to 14.9% in April 2009 from a 6.6% trough in November 2008.
Third, most countries in the region are implementing a fiscal spending plan of 3-5% of GDP, which has supported growth and employment.
Fourth, most countries in the region also initiated measures to boost property demand during 4Q08 (e.g., Hong Kong, China, India and Korea). These measures included lowering the down-payment for getting a mortgage loan or relaxing lending norms for property and mortgages.
Central Banks Already Voicing Some Concern
What has been the central banks’ response so far? Some have started to relay their concerns on asset prices. Last week a member of the Bank of Korea (BoK) board indicated that funds may be moving into stock and property. The board member commented, “Rising property prices may cause market instability”. Similarly, a few days back, BoK Governor Lee Seong-tae mentioned that the BoK “also has to pay attention to the possibility of rising international raw materials prices hurting (domestic) price stability or for a rapid increase in short-term liquidity causing instability in real estate and other asset prices”. Indeed, the governor of Korea’s financial supervisory service (FSS) has already advised banks to maintain restraint when growing home-backed lending. A Chinese banking sector regulator recently vowed to monitor closely banks’ lending behavior with a view to preventing allocation of bank lending to stock market and property. India’s central bank governor also, for the first time since the credit crunch unfolded last year, mentioned that the RBI would consider reversing its expansionary monetary policy, but he did not indicate any timing on such a reversal.
End of Monetary Easing, but Rate Hikes Are Some Time Away
To be sure, the national level of property prices in countries other than city states has not risen as sharply to justify the aggressive policy response. Any potential correction in the global risk markets could also reduce the pressure of asset price rises. However, considering the pace at which property prices have moved up in certain pockets of the region, it does raise the risk of broader national-level price rises. The challenge for the central banks arises from the fact that the export and IP growth trend remains below potential and has not yet recovered meaningfully. AXJ IP is estimated to have improved to 1.6% in April 2009 from the trough of -7.6% in January 2009. However, it remains below the prior trough that occurred in 2001. Similarly, while exports are declining at a slower rate, they remain weak.
Selective Controls May Be More Likely as a Response
The key question is, if property prices continue to rise in the near term across the region, what would be the likely policy response? We are currently expecting central banks to start raising policy rates in 1Q10 as the growth trend recovers further. Our global economics team expects G10 growth to follow a slow recovery path, starting in 2H09. In this environment, any concerns about asset prices in the next six months could be addressed by sector-specific measures, such as tightening lending standards for the property sector and/or other non-monetary policy measures.
Fed Exit Strategy: When and How? – David Greenlaw, Morgan Stanley
