Asia aims to succeed where Bernanke failed on bubbles

SINGAPORE: Policy makers from South Korea to Singapore, confronted with rising real-estate values that threaten to mimic in Asia the US mortgage bubble that roiled the global economy, are stepping up efforts to rein in prices.

Regulators in South Korea, Hong Kong and Singapore told banks in recent weeks they need to tighten lending standards. Central banks including India’s and South Korea’s have signalled a readiness to raise interest rates in the coming months.

Officials are trying to apply a lesson US Federal Reserve chairman Ben S Bernanke identified from the financial crisis that erupted in 2007: Constrain “excessive” leverage before it destabilises the economy. At risk is sustaining the economic expansion of the region leading the world out of recession.

“Asset bubbles are something that authorities have to contend with quickly and not let run away,” said Tai Hui, head of Southeast Asian economic research at Standard Chartered plc in Singapore. “Central banks are ready to take some of the wind out of the sails whether through interest rates or administrative measures.”

In Hong Kong, where mortgage rates are the lowest in at least 19 years, home prices have climbed 26% this year, spurring authorities to tighten down-payment requirements for luxury homes.

A 1-bedroom, 816 sq ft apartment in the city’s Kowloon district last month sold for HK$24.5 million (RM10.88 million).

Hong Kong’s index of finance stocks jumped 60% this year, and the measure for property shares is up 67%.

Singapore’s private-residential developers sold 10,000 units in the first seven months of 2009, more than the 4,300 sold the whole of last year. In South Korea, bank lending to households expanded for a seventh straight month in August as home prices rose.

Stocks are also surging in some markets. China’s Shanghai Composite Index is up 71% so far this year, compared with the 25% gain in the MSCI World Index, and benchmarks from Hong Kong, South Korea, Singapore and Taiwan are all up more than 50%. By comparison, the US Standard & Poor’s 500 Index has advanced 20%.

The advance in asset prices is also reprising debate over whether to respond with interest rates, or tighter rules for financial companies to restrain credit growth. Analysts said a combination of approaches is likely.

“The challenge for the central banks is whether you want to raise interest rates because asset prices could” cause a relapse of what befell advanced economies, said Robert Subbaraman, chief economist for non-Japan Asia at Nomura International Ltd in Hong Kong. “We’re starting to see kinds of quasi-type monetary policy through regulating prudential measures to try to lean against a rapid rise in asset prices.”

Fed policy makers, who had previously judged that asset-price swings weren’t a province for the central bank, abandoned that orthodoxy as the US mortgage collapse triggered US$1.6 trillion (RM5.44 trillion) of credit losses and writedowns to date.

San Francisco Fed president Janet Yellen said in April that “what has become patently obvious is that not dealing with certain kinds of bubbles before they get big can have grave consequences.”

Bernanke said in New York a year ago that “one of the key issues that’s going to be debated as we look at the problem of bubbles in the future is: What should be the leading approach? Should it be monetary policy, or should it be supervisory and regulatory policy.” Asian officials are taking steps in both directions.

In Singapore, the government barred interest-only loans for some housing projects last month. It also stopped allowing developers to absorb interest payments for apartments that are still being built.

Hong Kong authorities on Oct 23 limited buyers of homes costing more than HK$20 million to borrowing 60% of the property’s value, down from 70% before.

The Hong Kong Mortgage Corp, a government-backed home-loan insurer, suspended insurance for homes that aren’t owner-occupied.

South Korea’s financial regulator said Oct 8 it plans to tighten regulations on non-banking finance companies’ lending to households, and authorities have cut loan-to-value ratios in mortgages to 50% from 60% in some Seoul areas.

In the past month, China’s five largest banks were told to increase write-offs against bad loans and maintain their capital adequacy.

Besides such administrative measures, Asia’s central banks will need to “put a tight watch on monetary policies” to prevent asset bubbles, the Asian Development Bank said on Sept 22.

Australia acted early this month, with a quarter point increase in the central bank’s benchmark rate. Reserve Bank of Australia Governor Glenn Stevens said Oct 15 policy makers who made rapid rate cuts cannot be “too timid” when it comes time to reverse the stimulus.

Bank of Korea Governor Lee Seong Tae said the same day that rate rises may be bigger than the “usual baby step” of 25 basis points.

The Reserve Bank of India may soon signal it will reverse its deepest interest-rate cuts on record as inflation pressures build. – Bloomberg LP