Property market downturn poses threat to Asian banks

Hong Kong – Asian banks have largely escaped the worst of the global debt crisis, but housing market downturns threaten to pile up bad loans and slow the economy.

After property crashes burnt Japanese and southeast Asian lenders in the 1990s, they have been more cautious. So falling home prices are much less of a risk than in the US.Asian banks tend to limit loans to 70 per cent of home prices, compared with 80 per cent to full value in the West.Few mortgages are securitised, let alone twisted into the kind of complex packages that became toxic in the US.But just as in the US and Europe, property booms in Asia are turning to slowdowns, and even busts.With half the wealth of Malaysia, Singapore, South Korea and India tied to property, the potential impact on banks and economies is wide, according to brokerage house CLSA.”There’ll be a drag on economies,” said Leland Sun, the founder of Pan Asian Mortgage Company.The Asian Development Bank cut its economic growth forecast for Asia for next year to 7.8 per cent last month from 7.2 per cent, but the financial crisis has since deepened.Hong Kong and Singapore home prices are widely tipped to fall 15 per cent next year as job cuts hit financial centres.In South Korea, unsold homes are at a record high and prices are falling.India’s property boom fizzled into a price drop of a third this year in some cities, and analysts expect the same next year.But the biggest risk of property loan defaults is in China.Developers are slashing prices to stem a sales slump, dragging on the market.Ironically, many of the property industry’s woes stem from Beijing’s efforts to cool the market and fend off a crash, by a clampdown on loans to developers.Home sales plummeted and in response, China’s biggest property firm, China Vanke, dropped prices by a fifth at projects in Hangzhou and Shanghai.Other developers have gone further.In India, similar events are unfolding, with banks tightening lending for property after credit grew 26 per cent this year.”Developers are in trouble in India and China because they took on high gearing to expand land banks,” said Aaron Fischer, an Asia property analyst at CLSA.”You’ll see some bankruptcies.”The situation is so dire in China that economists expect the government to back-pedal, and fast, fearing the ruin of a property industry that accounts for a quarter of total investment and 10 per cent of gross domestic product (GDP).Local authorities have already stepped in, with Nanjing promising home buyers a subsidy and letting developers delay payments for land.”A year ago, China needed to tighten policies to ensure safety of the banking system and to bring down inflation,” said Ting Lu, a China economist at Merrill Lynch.”But who could have expected a global financial crisis like this?” But as long as mortgages are new to Asia, around for only a decade in some countries, they present less of a risk than in the West.Home loans represented only 12 per cent of GDP in China and 5 per cent in India, according to CLSA figures for last year.In the US, the ratio is 105 per cent.But Chinese banks had been slipshod in their lending practices, said Pan Asian’s Sun.Bad loans in the banking system stand at 5.6 per cent, however economists cite anecdotal evidence that defaults on property loans are creeping up.-www.busrep.co.zaSo falling home prices are much less of a risk than in the US.Asian banks tend to limit loans to 70 per cent of home prices, compared with 80 per cent to full value in the West.Few mortgages are securitised, let alone twisted into the kind of complex packages that became toxic in the US.But just as in the US and Europe, property booms in Asia are turning to slowdowns, and even busts.With half the wealth of Malaysia, Singapore, South Korea and India tied to property, the potential impact on banks and economies is wide, according to brokerage house CLSA.”There’ll be a drag on economies,” said Leland Sun, the founder of Pan Asian Mortgage Company.The Asian Development Bank cut its economic growth forecast for Asia for next year to 7.8 per cent last month from 7.2 per cent, but the financial crisis has since deepened.Hong Kong and Singapore home prices are widely tipped to fall 15 per cent next year as job cuts hit financial centres.In South Korea, unsold homes are at a record high and prices are falling.India’s property boom fizzled into a price drop of a third this year in some cities, and analysts expect the same next year.But the biggest risk of property loan defaults is in China.Developers are slashing prices to stem a sales slump, dragging on the market.Ironically, many of the property industry’s woes stem from Beijing’s efforts to cool the market and fend off a crash, by a clampdown on loans to developers.Home sales plummeted and in response, China’s biggest property firm, China Vanke, dropped prices by a fifth at projects in Hangzhou and Shanghai.Other developers have gone further.In India, similar events are unfolding, with banks tightening lending for property after credit grew 26 per cent this year.”Developers are in trouble in India and China because they took on high gearing to expand land banks,” said Aaron Fischer, an Asia property analyst at CLSA.”You’ll see some bankruptcies.”The situation is so dire in China that economists expect the government to back-pedal, and fast, fearing the ruin of a property industry that accounts for a quarter of total investment and 10 per cent of gross domestic product (GDP).Local authorities have already stepped in, with Nanjing promising home buyers a subsidy and letting developers delay payments for land.”A year ago, China needed to tighten policies to ensure safety of the banking system and to bring down inflation,” said Ting Lu, a China economist at Merrill Lynch.”But who could have expected a global financial crisis like this?” But as long as mortgages are new to Asia, around for only a decade in some countries, they present less of a risk than in the West.Home loans represented only 12 per cent of GDP in China and 5 per cent in India, according to CLSA figures for last year.In the US, the ratio is 105 per cent.But Chinese banks had been slipshod in their lending practices, said Pan Asian’s Sun.Bad loans in the banking system stand at 5.6 per cent, however economists cite anecdotal evidence that defaults on property loans are creeping up.-www.busrep.co.za