Hong Kong: 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 indicates that 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% this year from an estimated 6.9% 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% 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 economic slowdown across the region.
Hong Kong homeowner Maggie Chan has just put off buying her daughter a new watch and says she has had to do without new boots this winter.
With recession deepening, Chan, a clerical worker, fears she will soon be strapped with negative equity on the $385,000 two-bedroom apartment she bought eight years ago in the middle-class neighbourhood of Tai Koo Shing, 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, adding that there will be no holiday abroad for the family this year to match last summer’s trip to Thailand.
As exports and domestic consumption weaken, HSBC forecasts a 0.6% 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 2-3 quarters, but is moving more in sync with the US cycle in this crisis, says Goldman Sachs.
That’s partly because of the worsening credit crisis since Lehman Brothers’ collapse in mid-September, which 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, for example, banks are offering 70% mortgages on just 85-90% of the value of a property, says property consultants Colliers International.
Spencer at Deutsche Bank says Asian property prices are unlikely to pick up until exports, now falling at double-digit rates in some parts of the region, stabilise. And that will largely hinge on when US and European demand recovers.
“Exports are such a dominant source of income in Asia that their weakness is leading to a rapid decline in consumer spending,” he said.
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 Spencer expects more action may be needed, such as cutting taxes on property transactions and capital gains.
In China, captial gains tax exemptions and reduced down-payment requirements, together with hefty discounts by developers, have boosted property sales recently though they are still well down on a year ago and supply overhang persists in major cities like Beijing and Shenzhen, analysts say.
Elsewhere, the downtrend in prices is set to continue.
If US fiscal stimulus starts to boost economic activity, and Asian exports, in the second half of this year equity prices and consumer spirits could get a lift, but Asian property will lag, analysts say.
“I suspect we’re probably looking at 2010 across most markets in Asia (before we see a recovery in property) — although it could be quicker if people have the ability to borrow again,” said Piers Brunner, Asia chief operating officer at Colliers.