Asset Bubble Fears To Spark Fresh Macroprudential Measures

BMI View: Past painful experiences in Asia and recent reminders from the US of the adverse impacts from the bursting of asset bubbles have elevated the importance of mitigating systemic risks for many Asian monetary authorities. Indeed, over the course of 2013, a number of monetary authorities in Asia have been very active in implementing macroprudential rules, as many are unable to use the traditional interest rate tool. With the size of banking loans in many economies now bigger than the size their economies, we believe that central banks will implement more measures targeting banks' lending standards and risk assessments, alongside rules to discourage the inflow of foreign capital.

The deep economic impact suffered by countries like Spain and the US from the bursting of their property bubbles has spurred monetary authorities in Asia to improve the resilience of their financial systems, with a new focus on how the linkages between asset markets and credit in a country's banking system can reinforce price trends and exacerbate vulnerabilities. Over the last year, property markets in countries like Indonesia and New Zealand saw a sharp growth in prices (in the region of 12% and 8% respectively) while markets such as Hong Kong, Singapore, and Malaysia have recorded persistent increase in prices over the last six years. Together with client loans extended by banks climbing to levels above 100% of GDP in many Asian economies, it is unsurprising that a number of monetary authorities in Asia are keen to explore means by which they can keep banks and property speculation-driven credit growth in check.

Interest Rates: Constrained By Policy And Need For Precision

Sharp Gains In Regional Property Prices Triggering Alarm Bells
Property Price Growth For Selected Asian Countries, From Low (LHS), CAGR & Over 2013 (RHS), %

BMI View: Past painful experiences in Asia and recent reminders from the US of the adverse impacts from the bursting of asset bubbles have elevated the importance of mitigating systemic risks for many Asian monetary authorities. Indeed, over the course of 2013, a number of monetary authorities in Asia have been very active in implementing macroprudential rules, as many are unable to use the traditional interest rate tool. With the size of banking loans in many economies now bigger than the size their economies, we believe that central banks will implement more measures targeting banks' lending standards and risk assessments, alongside rules to discourage the inflow of foreign capital.

The deep economic impact suffered by countries like Spain and the US from the bursting of their property bubbles has spurred monetary authorities in Asia to improve the resilience of their financial systems, with a new focus on how the linkages between asset markets and credit in a country's banking system can reinforce price trends and exacerbate vulnerabilities. Over the last year, property markets in countries like Indonesia and New Zealand saw a sharp growth in prices (in the region of 12% and 8% respectively) while markets such as Hong Kong, Singapore, and Malaysia have recorded persistent increase in prices over the last six years. Together with client loans extended by banks climbing to levels above 100% of GDP in many Asian economies, it is unsurprising that a number of monetary authorities in Asia are keen to explore means by which they can keep banks and property speculation-driven credit growth in check.

Sharp Gains In Regional Property Prices Triggering Alarm Bells
Property Price Growth For Selected Asian Countries, From Low (LHS), CAGR & Over 2013 (RHS), %

Interest Rates: Constrained By Policy And Need For Precision

Among the tools available to central bankers, interest rate hikes are by far the most effective tool to rein in domestic credit growth, and in most cases, asset prices as well. In Asia, however, prior policy decisions (mainly exchange rate-related), foreign capital inflows (that are not subjected to local monetary conditions) make interest rates unviable or ineffective as a means to temper market forces. As such, a number of Asian monetary authorities have turned towards macroprudential rules - a collective term for measures aimed at mitigating systemic risks in the financial system.

Systemic Impact From Asset Price Declines Could Be Severe Given Sheer Size Of Banking Assets
Client Loans Extended By Commercial Banks In Selected Asian Countries, % of GDP

Of the five Asian countries that have implemented macroprudential measures in 2013, four of them (China, Hong Kong, Singapore, Malaysia) are constrained due to their choice of exchange rate determination, involving either the use of an outright fixed exchange rate or a managed-float ('dirty-float') system. The Reserve Bank of New Zealand (RBNZ) faces a different problem, while it can use its interest rate tool, authorities fear that interest rate hikes could crush the growth of business credit, which has so far, remained subdued compared to accelerating mortgage growth.

Table: Macroprudential Measures Directed At Consumers In 2013
Loan-To-Value (LTV) / Debt-To-Income Cap Other Taxes
China Mar: Beijing asked to raise downpayment requirements and rates for 2nd mortgages Mar: Stricter enforcement of 20% capital gain tax
Hong Kong Feb: Lower maximum LTV for first-time buyers, industrial and commercial property buyers Feb: Increase for all 3-types of stamp duty charges (special, buyer's and double stamp duty schedules)
Malaysia Oct: Hiked Real Property Gain taxes
Singapore Jan: Maximum LTV lowered for 2nd mortgage
Jun: Size of mortgages limited to total debt-servicing ratio of 60%
Aug: Reduced maximum loan tenures, mortgage payments capped at 30% of gross monthly income for public housing
Jan: Hikes for Seller and Additional Buyer stamp duties
Thailand (current moves in 2013 voluntary by banks)
Source: BMI, Various Central Banks, News Agencies

Macroprudential Measures So Far Aimed At Consumers

On top of the constraints that may restrict the use of interest rates, the preciseness of macroprudential rules grant central banks greater flexibility by allowing them to directly target investors (even certain classes of investors). Indeed, we have seen the bulk of these measures implemented in various Asian countries over 2013 directed at restraining the amount of debt individuals and businesses can use to purchase property. By requiring a larger cash down payment (which effectively reduces the loan-to-value [LTV] ratios), these loans have a larger equity component to absorb any price losses, which would help reduce the probability of loan losses and defaults. This, in turn, will serve to help reduce the fallout in the event of a property correction. That said, reducing LTV ratios often prevents lower income groups from entering even the lowest end of the property market, which often reduces the popularity of the incumbent party. As such, we believe that countries that have already reduced requirements are unlikely to cut LTV ratios further but could instead look to target those with more than one mortgage loan. That said, other countries like Australia and New Zealand may choose to pursue these measures.

Table: Macroprudential Measures Directed At Banks
Credit Growth Limits Risk-Related Metrics Others
Hong Kong Feb: Banks to assume a 300bps increase in mortgage rates rather than previous 200bps.
New Zealand Oct 1: Low LVR loans limited to 10% new mortgage loans Sep 30: Increase risk weights for low LVR loans
Singapore Jun: Banks to take into consideration all debt obligations before granting mortgages
Sep: New rules disallowing the extension of credit to individuals past in excess of past-due time and salary limits
Thailand Jul: Disclose effective interest rate and burden of interest
Source: BMI, Various Central Banks

Financial Stability Concerns To Keep Heat On Banks

Authorities have increasingly looked to ensure that banks continue to lend responsibly, as demand cannot be fully curtailed by higher LTV ratios. Indeed, with the heightened awareness of linkages between banks and the high likelihood for lending standards to decline in an upward trending asset market, it is unsurprising that central banks in Asia have shown great keenness to implement measures to strengthen the stability and resilience of their financial systems.

New Zealand, in particular, implemented macroprudential tools to restrain the growth of a certain types of loans (i.e. high LTV loans) and increased the relevant risk weights. Meanwhile, authorities in Singapore and Hong Kong have required their banks to improve the rigour of risk assessments of their loans. Given the past property crashes experienced in various Asian markets together with the recent ramp up in banking loans, we believe that authorities will remain amongst the most willing globally to implement greater measures, even though difficulties in ensuring compliance is expected to persist.

Table: Purchase Restrictions In Various Asian Countries
Countries Restrictions For Foreigners Purchasing Property
Australia Only purchases of uncompleted or new-builds
China Only foreigners residing in China allowed to purchase property
India Foreign nationals not allowed to purchase, only allowed to acquire property by way of inheritance from an Indian national
Indonesia Purchases by foreigners must benefit national development
Thailand Foreigner ownership of a single development is limited to 49%; land purchases must have a lease period of 30-year
Vietnam Only purchases of apartments or units with 50-year lease
Source: BMI, Government Sites

External Efforts To Force Greater Restrictions Against Foreign Inflows

Alongside the above measures (that would have the biggest impact on banks and local investors), foreign inflows of capital into Asian property markets are likely to face more macroprudential rules, especially in economies which are relatively more open (such as Hong Kong and Singapore). In part, restrictions in other countries (like China, Indonesia, and Thailand) within the region may have driven capital inflows to these open economies, but the recipient countries like Singapore and New Zealand often also boast of strong investor protection and attractive wage growth.

Table: Additional Requirements For Foreigners Purchasing Property
Countries Additional Requirements
Hong Kong Additional 10% to downpayments (2011), Additional 15% stamp duty for non-residents (2012)
Singapore Additional 15% upfront stamp duty for purchases by foreigners (2013)
Malaysia Doubled minimum price for house purchases & higher rate of real capital gain tax levied for properties disposed before 6 years(2013)
Source: BMI, Government Sites

For now, measures such as additional stamp duties and minimum purchase value for foreign buyers appear to have helped cooled demand in Hong Kong, Singapore, and Malaysia while also benefiting their respective fiscal accounts. However, should regional and global authorities begin to implement similar levies, the effectiveness of these rules may wane, forcing the more open Asian economies to further hike these levies and/or even pressure authorities towards enacting restrictions in line with those seen in the region.

Overall, we believe the use of these rules will increase as monetary authorities in Asia remain keen to alleviate pressures on their local asset markets and rein in excessive debt growth. This, in turn, is likely to weigh on economic activity in the region. Indeed, we remain below consensus on 2014 GDP growth rates for most countries in Asia, owing in part to our view that asset bubbles will need to be tamed.

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