Will Asia's Real Estate Bubble Burst Soon?

by: David Hunkar

Property prices in Asian countries have been rising at a staggering pace in the past few years due to the strength of their economies. Even during the global credit crisis last year prices did not decrease much, if at all, in most Asian countries.

In recent months, in addition to the spectacular run up in equity markets, Asian real estate markets have also heated up. In most countries this rise is not warranted based on fundamentals. While it's true that traditionally most Asians bought residential real estate as a place to live for life as opposed to making a killing via flipping, in recent years that attitude has been changing. Due to the availability of cheap credit, more Asians have become real estate speculators.

1. Singapore

In the tiny city state of Singapore, most of the residents live in apartments due to lack of land. While the Singaporean economy has rebounded slightly this year, prices in the property market are back to pre-crisis levels. As the domestic economy is mainly based on global trade and is services-based, if the global economy goes into a tailspin like last year, then the economy of Singapore will be negatively impacted.

On Nov. 3rd, the Asia Times reported on the property bubble in Singapore in a piece titled New heights for Singapore property. The article stated:

“Surging demand for residential units has in recent months seen potential buyers queue for hours before new house openings and anecdotally many have left blank checks with their property agents to fill out to secure their spots in new projects.

Private sector developers in July launched an all-time high of 2,878 new flats and an astounding 2,767 of those units were sold out within a month. That sales figure smashed by 52% the record of 1,825 units sold set the previous month. Over 43% of the transactions that took place in July fell under the middle- to high-end tier, with prices anywhere between S$1,000 (US$715) and S$1,999 per square foot depending on location.”

From the Journal’s Fears of a New Bubble as Cash Pours In:

“Over the summer, a Singapore condominium developer raised prices 5% the day before units went on sale. After dozens of would-be buyers lined up on a steamy night, the developer — a joint venture of Hong Leong Group and Japan’s Mitsui Fudosan — held a lottery for a chance to bid on the units. Singapore home prices rose 15.8% in the third quarter, the fastest rate in 28 years.”

Despite the promotion of Singapore as a major financial and tourism destination, high property prices may not be sustainable. The usually effective and prudent Singaporean government does very little to curb the growth of the bubble in the local property market.

2. India

The real estate market in India is a huge bubble and continues to show no sign of slowing down. Property prices, especially in the major cities, have shot up many fold over the years and are beyond the reach of ordinary middle class folks. The euphoria of the India growth story and the availability of cheap credit has propelled property prices to astronomical levels. Working with their highly powerful political friends, developers in India maintain artificially high prices defying the logic of supply and demand. During the last few years when the Indian economy took off, property prices soared and in the credit crunch last year, prices barely fell. Home prices in many cities are reaching or exceeding pre-crisis levels.

The supply side of the equation is fairly high now since in addition to local money, foreign investors are pouring money into the market via private equity deals. Astonishing profits in real estate have lured all types of investors into the market leading to speculation in many local markets. The growth in real estate also poses a huge risk to the Indian banking industry since they provided huge loans to developers and buyers alike. Prices in most cities are expensive with an average looking 2 BR apartment costing $150K or more. In many projects, basic infrastructure such as drinking water, sewage systems, roads, etc. are not developed to match global standards. Despite these issues, home prices have increased by double digit percentages in some cities just in the first half of this year alone.

3. Hong Kong

Housing demand has always been high in Hong Kong. With a limited availability of land, builders usually built residential towers that reached many floors. However due to the strong performance of China’s economy, many of the wealthy mainland Chinese are now investing heavily in the property market in Hong Kong, creating a bubble. A couple of examples from a Wall Street Journal article:

“In Hong Kong, high-end real-estate prices are soaring. A luxury flat in the tony Midlevels district is expected to sell for US$55.6 million, or $9,200 a square foot, said developer Henderson Land Development Co. Elsewhere, a bidder at a city-run auction to operate food stands at February’s Lunar New Year celebration recently paid a record US$63,225 for the right to occupy a 400-square-foot stall to sell fish balls and other snacks. Prices in the auction of 180 stalls were up 33% from 2008.”

In order to curb this bubble in the high-end property market, Hong Kong’s Monetary Authority has raised the minimum down payment required on luxury homes from 30% to 40% as of late last month.

From In Hong Kong, a $56.6 Million Apartment in the New York Times:

“Donald Tsang, the city’s chief executive, cautioned in his annual policy address Wednesday that the boom might not last.

“The relatively small number of residential units completed and the record prices attained in certain transactions this year have caused concern about the supply of flats, difficulty in purchasing a home and the possibility of a property bubble,” Mr. Tsang said.”

4. China

Residential prices in mainland China started increasing again early this year after a lull in 2008. The demand for housing exceeds the supply in most of China. However prices at the current levels cannot be sustained into the future. The rising real estate bubble in China was underscored earlier this year when a house in Shanghai sold for a whopping £25m.

The rising property market is also causing concern among the rating agencies. In China property market a sovereign rating concern - Fitch, Reuters wrote:

“Chinese property and stock prices have surged this year, helped by very loose monetary policy and aggressive bank lending.

“The China property issue raises some concerns with respect to asset quality in the banks. The banking system is a sovereign rating weakness. Clearly banks in any country with a property bubble would be affected, but banks in China are, as noted, already a weakness.”

Chinese banks extended a total of 8.67 trillion yuan ($1.2 trillion) in new loans in the first nine months, 75 percent more than all of 2008, triggering concern about potential new bad loans ahead.”

Flexible government policies this year are causing the rise in real estate prices. The Chinese government has a strong incentive to keep the party going since the property sector is one of the biggest drivers of China’s domestic consumption, accounting for one-tenth of China’s GDP. China is following the example set by Uncle Sam, which created the largest real estate bubble in this country. The US government’s policies in the decades since WWII considered home ownership to be a right as opposed to a privilege. This misconstrued policy led millions of people to buy homes which they could never afford in the first place.

5. Australia

Residential home prices are rising in Australia. A recent Marketwatch article stated:

“Defying the global real-estate shakeout, Australian house prices surged to a record in the third quarter, lifted by a strong economy and rising demand from a fast-growing population..."

“A gauge of prices in the eight regional capitals rose 6.2% in the third quarter from a year earlier, and 4.2% above the previous quarter, the Statistic Bureau said Monday. The Australian government has cited a shortage of available homes among reasons for the rapid price gains. Also commonly cited among economists are population gains as the nation’s resilient economy, which avoided the recession triggered by the global economic maelstrom, attracts a steady flow of immigrants looking for jobs.”

However it must be noted that the Australian government triggered the rise in home sales due to liberal incentives offered to first-time home buyers. For a long time the first-time home buyer grant was A$7,000. In October 2008, the government increased it to A$14,000 for the purchase of established homes and A$21,000 for the purchase of newly-built homes. Many immigrants and locals took advantage of this great deal giving a boost to home sales.

From the Journal piece:

“After a Melbourne property-research firm recently predicted that average home prices will double over the next 12 years, a news report in Australia’s Herald Sun said: “The staggering prediction shows the importance of buying a home as soon as you can afford it because the longer buyers delay, the more chance there is that their dream will slip out of their reach.”"

In summary, the real estate market in many Asian countries is indeed a massive bubble now and is being maintained that way by governments. The rise in property property prices in emerging markets such as India and China are not supported by the market's fundamentals and are bound to pop in the future. For international investors, caution is warranted before jumping into real estate investments in Asia.

Related ETFs:

SPDR DJ International Real Estate ETF (NYSEARCA:RWX)
WisdomTree International Real Estate (NYSEARCA:DRW)
Claymore/AlphaShares China Real Estate (NYSEARCA:TAO)

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