South-east Asian Property Market carries Growing Risks

What Next

South-east Asian banks will be tested as the eventual end of quantitative easing (QE) adversely affects local currencies, capital flows, financial asset prices, borrowing costs, and repayment capabilities of corporate and household borrowers. A rise in interest rates and cost of borrowing could prompt a surge in bad loans. This risk is particularly acute for property markets (rather than productive sectors) in such economies as Malaysia, Thailand and Singapore, where prices are at record levels, affordability is over-stretched, household debt stands at around 80% of GDP and debt service ratio is high.

Analysis

The financial and property markets in South-east Asia have been major beneficiaries of QE between November 2008 and 2013. Even though South-east Asia's growth has been stronger than in the United States and Europe, much of it is driven by a modest rebound in exports and strong growth in domestic consumption, which in turn has been fuelled by 'easy money' and cheap credit.QE has not only worsened income distribution, as the rich benefit most from financial asset inflation, but also led to misallocation of capital (rising inequality poses challenge).

Household Loans

Between 2008 and 2012, in the five largest South-east Asian economies household loans constitute the largest category of bank credit. This is especially true for Malaysia, Thailand and Singapore, where household debt-to-GDP ratio has reached 83%, 80% and 77% respectively. Meanwhile, household incomes have not grown by as much, stretching household debt-servicing capability. Malaysia has the highest ratio of household debt to disposable income at 140%, with Singapore at 105%. The largest component within household loans is housing, followed by car and credit card. Together with loans to the construction and real estate sector, the exposure of banks to the property sector far outweighs that to the productive sectors such as manufacturing and trade. Hence, household and property sectors are more vulnerable to a credit crisis than the productive sectors.

Mortgage Risk

Most household loans have gone to financing housing mortgages. Housing loans account for 48% of totals loans in Singapore and 27% in Malaysia (not including loans from shadow banks). In a period of low to negative interest rates, huge amounts of funds have flowed into the property markets, much of that amount borrowed:

• The housing market is no longer simply a market for end users, i.e. housing as a means of consumption. Housing has become primarily an asset class for investors and speculators. This has provided the momentum for double -- even triple -- digit escalation of house prices in certain markets.
• Housing affordability indices (the ratio of average house price to average annual household income) in many South-east Asian countries are highly stretched, some reaching double digits.

A rise in interest rates would hit borrowers badly as most housing mortgages are preconditioned on an adjustable rate. All these pose significant risks to the banking system and the economy.

Therefore buying property using bank loans might be risk now, if we have high housing mortgages. Though many people are renting out their apartments to finance the loans.

More information can be found in the OXFORD Analytical