Nothing works like credit tightening

Judging from the recent experience of countries in the region, it appears nothing is more effective in managing runaway real estate markets – in the absence of a recession – than a bout of credit tightening.

Other cooling measures like higher downpayment rules, steeper stamp duties and property taxes coupled with various caps and limits on purchases have been shown to be less effective without the accompaniment of some form of credit tightening.

In the region, the booming property markets in India and Australia were among the first to be tamed by interest rate hikes. These tightening moves were soon followed by the monetary authorities in neighbouring countries. The major motivation for the rate hikes was to combat runaway inflation but real estate and other businesses suffered collateral damage.

I remember a period when the pace of credit tightening in India was so relentless that it elicited loud howls of protest from the business community. Indian developers fanned out across the region, some of them coming to Singapore – which was seen as an oasis of liquidity – to seek fresh funds from investors or partners in a bid to rescue stalled projects.

What happened to India some years back is now happening to China. The debt crisis in the southern city of Wenzhou is a good example of how severe the fallout on other sectors of the economy can be.

For India, the housing market seems to have caught hold of a second wind and the property cycle for some cities is on the upswing again.

However, the problem of high property prices is so huge in China that, even as the screws on credit grow ever tighter, some city authorities see it fit to introduce even more drastic measures.

On Tuesday, the southern city of Zhuhai set a cap for home prices at 11,285 yuan (S$2,264) per sq m, possibly the most extreme property price-tightening measure imposed by a Chinese city so far. Developers asking for a price higher than that will be refused the permits to sell their projects.

Other blunt measures introduced earlier in some Chinese cities included limiting each household to a single purchase. This led to some “paper” divorces as some investors tried to get around the rule.

The compounding effect of the slew of cooling measures in China has now led to falling sales and prices in some cities and to huge discounts for some projects whose developers are having cash flow problems. If overall prices have not yet been corrected in China, it looks like this may happen within the next few months.

Chinese developers who were on the brink of tipping over three to four years ago were given a reprieve when Beijing pumped trillions of yuan into the economy in response to the global financial crisis resulting from the US sub-prime fiasco. Will another global crisis be their saviour this time?

Being so close to China, both in distance as well as in economic links, it was only a matter of time before trends taking place in China were mirrored in Hong Kong.

The overall value of housing transactions halved last month in Hong Kong from a year ago. In terms of residential units, sales dropped 2.2 per cent from September. Although direct purchases from developers rose from the previous month, these were not enough to offset the slide in secondary market transactions. Trend-wise, it was the 10th straight month of declining home sales.

A fund manager based there told me that Hong Kong developers will stubbornly resist lowering their prices until it begins to hurt. In the meantime, he feels sales volume will continue to decline.

Barclays Capital Research recently issued a report which predicted that Hong Kong residential property prices would drop 35 to 45 per cent over the next two years. Will it come to pass?

For Singapore property investors, the tension must be building up although they are not showing signs of panic.

Let us wait and see what happens to Hong Kong. It might also be comforting to know that a recent survey released in Shanghai showed that nearly half of Chinese who have assets worth more than 10 million yuan are considering emigration.

Can these be the potential new citizens who will come to our rescue?

By Colin Tan – head of research and consultancy at Chesterton Suntec International.

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