Macro-prudential lessons from Asia
Alex Barrett
2nd November 2010
Thailand
Real estate investment boomed given easy bank credits
Sources: NESDB, BoT, Standard Chartered Research
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
Bank loans (% growth)
Fixed capital formation (% to GDP)
4
Saving-investment gap in negative territory due to over investment
Sources: BoT, Standard Chartered Research
-10.0
-5.0
0.0
5.0
10.0
15.0
Current account balance (% of GDP)
The current account balance, 1979-2009
5
Double digits interest rates locally under fixed exchange rate
Before July 1997, Thailand adopted the pegged exchange rate regime Under the pegged FX system, FIs borrowed cheap S/T USD and swapped it
into THB
A shift in FX regime to the floating system in July 1997
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
Prime lending rate
1-yr fixed deposit rate
(%)
Sources: BoT, Standard Chartered Research
Hong Kong
Hong Kong property sector
Property prices by segment, vs. previous peak Affordability deteriorating, but still manageable
Sources: CEIC, Centraline, Midland, Standard Chartered Research
0
50
100
150
200
250
Jan-
97
Jan-
99
Jan-
01
Jan-
03
Jan-
05
Jan-
07
Jan-
09
Class A to C (Low - and mid-end)Class D and E (high-end)
Banking system stability
Improving asset quality in banks’ balance sheet Negative equity peaked in 2003
Sources: CEIC, Standard Chartered Research
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
(%)
0
50
100
150
200
250
300
350
Mortgage Delinquency Ratio > 3 Months
Mortgage Delinquency Ratio > 6 Months
Written Off Value (HKD mn, RHS)
0
20000
40000
60000
80000
100000
120000
2001
2003
2005
2007
2009
020,00040,000
60,00080,000100,000120,000
140,000160,000180,000
Negativ e Equity : No of Case (LHS)
Negativ e Equity : Outstanding Loans (HKDmn, RHS)
Economic performance – throughout the cycles
Hong Kong has experienced 3 recessions after 1997 Unemployment rate – still low in historical standards
Sources: CEIC, Standard Chartered Research
-10%
-5%
0%
5%
10%
15%
Mar-
96
Mar-
98
Mar-
00
Mar-
02
Mar-
04
Mar-
06
Mar-
08
Mar-
10
GDP (%y /y )Personal consumption ex penditure (%y /y )
0.0
1.02.0
3.04.0
5.06.0
7.08.0
9.0
3/1
996
12/1
997
9/1
999
6/2
001
3/2
003
12/2
004
9/2
006
6/2
008
3/2
010
Unemploy ment rate (% NSA)
Hong Kong property measures – relaxation period
Sources: Bloomberg, Standard Chartered Research
Chief Executive Tung Che Hwa announced the 85,000 housing units production target
Introduction of the Home Starter Loan Scheme
Introduction of the Tenants Purchase Scheme – to assist residents to purchase public housing
Incorporation of the Hong Kong Mortgage Corporation to develop Hong Kong's secondary mortgage market
1998 Introduction of mortgage interest deduction
Temporary suspension of land auction
Expansion of the Hong Starter Loan Scheme, and relax applicability requirement to cover residence in public housing
Cancellation of the Sandwich Class Housing Scheme
Relax pre-sale restriction of residential properties
Introduction of 85% mortgage insurance scheme
Restarted land auction in April 1999
Proposal to increase stamp duty for properties of value above HKD3mn
1997
1999
Temporarily suspension of Home Ownership Scheme, units built were converted into public rental housing
Chief Executive Tung Che Hwa announced abolition of the 85,000 housing units production target in July 20002000
Further relaxation of anti-speculative measures
Temporarily suspension of Home Ownership Scheme for another 10 months
Introduction of the scheme for 100% refinancing of mortgages in negative equity2001
Hong Kong property measures – relaxation period
Sources: Bloomberg, Standard Chartered Research
Reintroduction of Home Ownership Scheme
Introduction of the Home Assistance Loan Scheme to replace the Home Starter Loan Scheme. The scheme provides home purchase assistance towards down-payment and related expenses in the form of interest-free loan or monthly mortgage subsidy
Secretary for Housing, Planning and Lands Michael Suen introduced 9 measures to support the housing market in November 2002 Cancel regular land auction, suspend land supply in the application list for 1 year Suspend auction of projects held by the two rail companies MTRC and KCRC for 1 year Supply of public rental housing to be driven by the market Abolishment of the Home Ownership Scheme New interest-free loan programme for low income families Abolishment of Home Purchase Loan Scheme Abolishment of the Tenants Purchase Scheme Relax redevelopment requirements for old residential buildings Relax internal subscription restrictions for private property projects
2002
Stop application for Hong Assistance Loan Scheme in 2003
Resume land sales in 2004
Relax down-payment limits to 95% in 2004
Reduced stamp duty of properties value between HKD1-2mn to fixed amount of HKD100
2003-2007
Macro prudential measures to contain the risk of housing bubble
Sources: Bloomberg, Standard Chartered Research
Loan-to-value ratios for mortgages on properties valued at HKD 20m or more cut to 60% from 70%.
Mortgage for properties valued at below HKD 20m capped at the lower of HKD 12m or 70% LTV.Oct 23, 2009
LTV cut to 60% for properties valued at HKD 12mn or more, or non-owner-occupied properties. Mortgage for other properties capped at the lower of HKD 7.2mn or 70% LTV
Debt servicing ratios (DSRs) of mortgage applicants capped at 50%, and 60% if mortgage rates were to rise by 200bps.
The government offers 3 new sites for auction in 2010, increases land supply in the application list in 2011 and 2012, identifies over 20 hectares of rural land for conversion to residential use.
To limit speculation, cancellation fees raised to 10% of deposits from 5%, and banned the resale of unfinished new homes before transactions.
Oct 23, 2009
Government pledged to supply 61,000 private residential flat over 3-4 years
Temporarily excluded real estate investment from the Capital Investment Entrant Scheme
Introduced a new "rent-to-buy" scheme and tightened disclosure of usable areas of buildings.
Oct 23, 2009
Appendix – Regulatory framework of licensed banks in Hong Kong
Sources: Bloomberg, Standard Chartered Research
Liquidity
Capital Adequacy
Reporting
Minimum monthly average liquidity ratio of 25%, calculated as the ratio of liquefiable assets (e.g. marketable debt securities and loans repayable within one month subject to their respective liquidity conversion factors) to qualifying liabilities (basically all liabilities due within one month).
Minimum CAR of 8%, but the Monetary Authority may under section 101 of the Ordinance increase the minimum ratio to not more than 16%
Regular statutory returns cover information on assets and liabilities, profit and loss, capital adequacy (in respect of credit risk, market risk and operational risk), liquidity, large exposures, loan classification, foreign exchange position, interest rate risk, and include a certificate of compliance with various requirements under the Banking Ordinance. Submission of returns is normally made each month or quarter.
Singapore
Nominal property price index rose to yet another record in Q3-2010 but not yet in real terms, and pace of increase moderated
0
20
40
60
80
100
120
140
160
180
200
Sep, 1985 Sep, 1991 Sep, 1997 Sep, 2003 Sep, 2009
P r ivate r esidential pr oper ty pr ice
index (Q4-1998 =100)
P r ivate r esidential pr oper ty pr ice
index (r eal)
Sources: Standard Chartered Global Research, CEIC
Property prices & rental rates y/y increase
Sources: SCB Global Research, CEIC
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60% Property price indexRental index
Property prices & rental rates q/q increase
Sources: SCB Global Research, CEIC
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20% Property price indexRental index
Private residential transaction value now well exceeds 1997, but still below 2007
Sources: Standard Chartered Research, CEIC
0
2000
4000
6000
8000
10000
Ja
n, 1
99
5
Ju
l, 1
99
5
Ja
n, 1
99
6
Ju
l, 1
99
6
Ja
n, 1
99
7
Ju
l, 1
99
7
Ja
n, 1
99
8
Ju
l, 1
99
8
Ja
n, 1
99
9
Ju
l, 1
99
9
Ja
n, 2
00
0
Ju
l, 2
00
0
Ja
n, 2
00
1
Ju
l, 2
00
1
Ja
n, 2
00
2
Ju
l, 2
00
2
Ja
n, 2
00
3
Ju
l, 2
00
3
Ja
n, 2
00
4
Ju
l, 2
00
4
Ja
n, 2
00
5
Ju
l, 2
00
5
Ja
n, 2
00
6
Ju
l, 2
00
6
Ja
n, 2
00
7
Ju
l, 2
00
7
Ja
n, 2
00
8
Ju
l, 2
00
8
Ja
n, 2
00
9
Ju
l, 2
00
9
Ja
n, 2
01
0
Ju
l, 2
01
0
Residential property monthly transactions value (SGD mn)
What was done in 1997?
The government tried to stem this bubble by increasing land sales to increase the supply of residential units. And it also introduced more draconian measures to curb speculation including;
Housing loans limited to 80% (from 90%) for property purchase
Capital gains tax from the sale of properties bought within 3 years
Additional stamp duty within 3 years of purchase of properties for sellers
Stamp duty for buyers of sales and sub-sales of uncompleted properties
Foreigners were disallowed from taking housing loans
Permanent residents were limited to only one housing loan
Under the weight of the tightening measures combined with the impact of the onset of the Asian Financial Crisis, the property market subsequently tanked. The private residential property index peaked at 181.4 in June 1996 and contracted for the next 2 and half years by nearly 45% from the peak.
What is being done now?
In its management of asset price inflation, the Singapore government announced 3 batches of cooling measures for private and public residential property market aimed at curtailing demand and expanding supply. Even as the economy was still on the mend, the government implemented the first set of benign anti-speculative measures on 14 September 2009:
Reinstatement of the Confirmed List for the 1st Half 2010 Government Land Sales (GLS) Programme.
Removal of the Interest Absorption Scheme (IAS) and Interest-Only Housing Loans (IOL), with effect from 14 Sep 2009.
Non-extension of the Jan 2009 Budget assistance measures for the property market when the measures expire.
On 19 February 2010, the government introduced the 2nd set of measures:
Lowering the Loan-to-Value (LTV) limit to 80% for all housing loans provided by financial institutions
Introducing a Seller’s Stamp Duty (SSD) on all residential properties and residential lands that are bought after today and sold within 1 year from the date of purchase
On 30 August 2010, the Singapore Government announced the 3rd set of measures:
lower loan-to-value (LTV) for second mortgages of 70% from 80%;
increase cash down payments for second mortgages to 10% from 5%;
apply Seller Stamp Duty for properties sold within 3 years of purchase from 1 year;
higher income ceiling for public housing Design-Build-Sell-Scheme (DBSS) flats to S$10,000/household from S$8,000/household;
increase public housing supply to 22,000 units in 2011 from 16,000 units in 2010;
tighten public housing rules to ensure public housing is primarily for owner occupation, discouraging investment in public housing for rental yield.
Singapore private property price index BEFORE the anti-speculative measures implemented in May 1996
Forecasts
Source: Real Estate Developers' Association of Singapore (REDAS)
Source: Real Estate Developers' Association of Singapore (REDAS)
Singapore private property price index AFTER the anti-speculative measures implemented in May 1996
China
A super-cycle of world GDP growth
Sources: Maddison, IMF, Standard Chartered Research
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
'1820 '1840 '1860 '1880 1900 1920 1940 1960 1980 2000 2020
Actual world GDP growth Average world GDP growth
1820-1870: 1.7%
1870-1913: 2.7%
1913-1946: 1.7%
1946-1973: 5.0%
1973-1999: 2.8%
2000-2030: 3.6%
Emerging markets dominate by 2030
Nominal GDP 2010, USD 62trn% of global
Nominal GDP 2030, USD 309trn% of global
Sources: IMF, Standard Chartered Research
Asia ex CIJ 6%
SSA 2%
MENA 3%
Latam 6%
EU-27 27%
Japan 10%
ROW 6%
India 3%
China 10%
CIS 3%
US 24%
Asia ex CIJ 8%
SSA 5%
MENA 6%
Latam 9%
EU-27 14%
Japan 3%
ROW 5%
India 10%
China 23%
CIS 5%
US 12%
Sources: IMF, Standard Chartered Research
SouthKorea
Indonesia
Australia
India
Euro area
UK
Brazil
US
China
Singapore
Hong Kong
Monetary conditions are very loose
Note: This map is for illustrative purposes only and is based off 3 month interbank rates minus annualised CPI;Source: Standard Chartered Research
-1.6% -0.4%
-0.9%
-2.1%
-1.9%-0.2%
+2.0%
+2.2%
-2.6%
+1.8%
-0.8%
Select economies real interest rates %
Ongoing inflow into emerging markets
The stimulus is ending
-20
0
20
40
60
2005 2006 2007 2008 2009 2010
New project, y/y %, 3mma Total project under construction, y/y %, 3mma
Outstanding investment project growth stabilising
The CNY 4trn package: official
Sources: CEIC, Standard Chartered Research
Rural infrastructure
9%
Enviromental conservation
9%
Welfare housing7%
Innovation1%
Earthquake zone25%
Roads, railways, airport, power
grids45%
Healthcare, education, culture
4%
Fairly easy monetary policy…still
New lending growth under control
Sources: CEIC, Standard Chartered Research
Household mortgage demand strong
0
300
600
900
1,200
1,500
1,800
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Corporates Households
-400
-200
0
200
400
600
800
1,000
1,200
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Short term and bill finance, RMB bn Medium and long term, RMB bn
Wages up, incomes up
Migrant wages, real growth, CNY, y/y %,
0%
5%
10%
15%
20%
25%
2002 2003 2004 2005 2006 2007 2008 2009 2010
0
2
4
6
8
10
12
14
16
18
2003 2004 2005 2006 2007 2008 2009 2010
Disposable income, real, y/y %Consumption expenditure, real, y/y %
Urban incomes rising, too
Sources: CASS, CEIC, Bloomberg, Standard Chartered Research
Bubbles in China
House prices, average Selling Pries (ASP), CNY per sqm sold
Sources: CRIC, Standard Chartered Research
0
5,000
10,000
15,000
20,000
25,000
30,000
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Beijing Shanghai Shenzhen Hangzhou GuangzhouHaikou Tianjin Xian Wuhan Chengdu
A Chinese luxury wedding
Sources: OMG
Policy mistakes in the west
0
1
2
3
4
5
Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10
%
Euro area (inflation) US (inflation)3M Euribor 3m USD Libor
Negative real ratesIn the US
-6.5%
-5.5%
-4.5%
-3.5%
-2.5%
-1.5%
-0.5%
0.5%
1.5%
2.5%
3.5%
4.5%
5.5%
6.5%
7.5%
1 3 5 7 9
11
13
15
17
19
21
23
25
27
29
31
33
35
37
Mar-53 Jul-74 May-81 Mar-90 Nov-07
Unemployment in the US in 5 recessions% of workforce vs weeks from start of recession
Interest rates and inflation in Europe and the US%
Policy mistakes in the west
Disclaimer
This communication is issued by Standard Chartered Bank (“Standard Chartered” or “we”), a firm authorised and regulated by the United Kingdom’s Financial Services Authority. It is not directed at Retail Clients in the European Economic Area as defined by Directive 2004/39/EC neither has it been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. It is for information and discussion purposes only and does not constitute either an offer to sell or the solicitation of an offer to buy any security or any financial instrument or enter into any transaction.
Information contained herein, which is subject to change at any time without notice, has been obtained from sources believed to be reliable. While all reasonable care has been taken in preparing this communication, no responsibility or liability is accepted for any errors of fact, omission or for any opinion expressed herein. Standard Chartered may not have the necessary licenses to provide services, offer products or distribute research in all countries or such provision of services, offering of products or distribution of research may be subject to the regulatory requirements of each jurisdiction and you should check with your relationship manager or usual contact. No representation is made that the information contained herein is appropriate for use in all locations, or that any products, investments and/or services discussed herein are available or appropriate for sale or use in all jurisdictions, or by any investors or counterparties. You are advised to exercise your own independent judgment (with the advice of your professional advisers as necessary) with respect to the risks and consequences of any matter contained herein. We expressly disclaim any liability and responsibility for any losses arising from any uses to which this communication is put and for any errors or omissions in this communication.
In China, this communication is distributed by Standard Chartered Bank (China) Limited, which is regulated by the China Banking Regulatory Commission. In Hong Kong, this communication is distributed by Standard Chartered Bank (Hong Kong) Limited. In Korea, this communication is distributed by Standard Chartered First Bank Korea Limited which is regulated by the Financial Supervisory Service. In Malaysia, this communication is distributed by Standard Chartered Bank Malaysia Berhad. In the United Arab Emirates, Standard Chartered Bank is regulated by the Dubai Financial Services Authority. In the United States this communication is distributed by Standard Chartered Securities (North America) Inc. (“SCSNAI”) a member of Financial Industry Regulatory Authority (“FINRA”) and Securities Investor Protection Corporation (“SIPC”).
SCSNAI or an affiliate may have positions or act as a market maker in securities or financial instruments mentioned herein and may also act as advisor or lender to an issuer mentioned herein. Additional information is available upon request.
This communication is not for distribution to any person or to any jurisdiction in which its distribution would be prohibited.
Do not invest in investment products unless you fully understand and are willing to assume the risks associated with them.
© Copyright 2010 Standard Chartered Bank / Standard Chartered Securities (North America) Inc. All rights reserved. All copyrights subsisting and arising out of these materials belong to Standard Chartered Bank and may not be reproduced, distributed, amended, modified, adapted, transmitted in any form, or translated in any way without the prior written consent of Standard Chartered Bank.