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Macro-prudential lessons from Asia
Alex Barrett
2nd November 2010
Thailand
Real estate investment boomed given easy bank credits
50.0
Bank loans (% growth)
40.0
Fixed capital formation (% to GDP)
30.0
20.0
10.0
0.0
-10.0
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
-20.0
Sources: NESDB, BoT, Standard Chartered Research
Saving-investment gap in negative territory due to over investment
The current account balance, 1979-2009
15.0
10.0
Current account balance (% of GDP)
5.0
0.0
-5.0
20
09
20
07
20
05
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
-10.0
Sources: BoT, Standard Chartered Research
4
Double digits interest rates locally under fixed exchange rate
A shift in FX regime to the floating system in July 1997
(%)
18.00
16.00
Prime lending rate
1-yr fixed deposit rate
14.00
12.00
10.00
8.00
6.00
4.00
2.00


09
20
07
20
05
20
03
20
01
20
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
19
79
0.00
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
Sources: BoT, Standard Chartered Research
5
Hong Kong
Hong Kong property sector
Property prices by segment, vs. previous peak
Affordability deteriorating, but still manageable
250
200
150
100
50
Jan-09
Jan-07
Jan-05
Jan-03
Jan-01
Jan-99
Jan-97
0
Class A to C (Low - and mid-end)
Class D and E (high-end)
Sources: CEIC, Centraline, Midland, Standard Chartered Research
Banking system stability
Negative equity peaked in 2003
1.6
350
120000
1.4
1.2
300
100000
1.0
0.8
200
80000
0.6
0.4
150
60000
100
40000
180,000
160,000
140,000
250
Mortgage Delinquency Ratio > 3 Months
40,000
20,000
0
20000
2009
2007
2005
0
2003
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
120,000
100,000
80,000
60,000
2001
50
0.2
0.0
2000
(%)
Improving asset quality in banks’ balance sheet
Negativ e Equity : No of Case (LHS)
Mortgage Delinquency Ratio > 6 Months
Written Off Value (HKD mn, RHS)
Negativ e Equity : Outstanding Loans (HKD
mn, RHS)
Sources: CEIC, Standard Chartered Research
Economic performance – throughout the cycles
Hong Kong has experienced 3 recessions after 1997
15%
Unemployment rate – still low in historical standards
GDP (%y /y )
Personal consumption ex penditure (%y /y )
3/2010
6/2008
9/2006
12/2004
Mar-10
Mar-08
Mar-06
Mar-04
Mar-02
Mar-00
Mar-98
Mar-96
-10%
3/2003
-5%
6/2001
0%
9/1999
5%
12/1997
10%
3/1996
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Unemploy ment rate (% NSA)
Sources: CEIC, Standard Chartered Research
Hong Kong property measures – relaxation period
1997
1998
1999
2000
2001




Chief Executive Tung Che Hwa announced the 85,000 housing units production target



Introduction of mortgage interest deduction


Cancellation of the Sandwich Class Housing Scheme



Introduction of 85% mortgage insurance scheme


Temporarily suspension of Home Ownership Scheme, units built were converted into public rental housing



Further relaxation of anti-speculative measures
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
Temporary suspension of land auction
Expansion of the Hong Starter Loan Scheme, and relax applicability requirement to cover residence in public
housing
Relax pre-sale restriction of residential properties
Restarted land auction in April 1999
Proposal to increase stamp duty for properties of value above HKD3mn
Chief Executive Tung Che Hwa announced abolition of the 85,000 housing units production target in July 2000
Temporarily suspension of Home Ownership Scheme for another 10 months
Introduction of the scheme for 100% refinancing of mortgages in negative equity
Sources: Bloomberg, Standard Chartered Research
Hong Kong property measures – relaxation period
2002
2003-2007


Reintroduction of Home Ownership Scheme

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




Stop application for Hong Assistance Loan Scheme in 2003
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
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
Sources: Bloomberg, Standard Chartered Research
Macro prudential measures to contain the risk of housing bubble
Oct 23, 2009
Oct 23, 2009
Oct 23, 2009


Loan-to-value ratios for mortgages on properties valued at HKD 20m or more cut to 60% from 70%.

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.



Government pledged to supply 61,000 private residential flat over 3-4 years
Mortgage for properties valued at below HKD 20m capped at the lower of HKD 12m or 70% LTV.
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.
Sources: Bloomberg, Standard Chartered Research
Appendix – Regulatory framework of licensed banks in Hong Kong
 Minimum monthly average liquidity ratio of 25%, calculated as the
Liquidity
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%
Capital Adequacy
 Regular statutory returns cover information on assets and liabilities,
Reporting
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.
Sources: Bloomberg, Standard Chartered Research
Singapore
Nominal property price index rose to yet another record in Q3-2010 but
not yet in real terms, and pace of increase moderated
Sources: Standard Chartered Global Research, CEIC
Property prices & rental rates y/y increase
60%
50%
Property price index
Rental index
40%
30%
20%
10%
0%
-10%
-20%
-30%
M
ar
M 91
ar
M 92
ar
M 93
ar
M 94
ar
M 95
ar
M 96
ar
M 97
ar
M 98
ar
M 99
ar
M 00
ar
M 01
ar
M 02
ar
M 03
ar
M 04
ar
M 05
ar
M 06
ar
M 07
ar
M 08
ar
M 09
ar
-1
0
-40%
Sources: SCB Global Research, CEIC
M 91
ar
M 92
ar
M 93
ar
M 94
ar
M 95
ar
M 96
ar
M 97
ar
M 98
ar
M 99
ar
M 00
ar
M 01
ar
M 02
ar
M 03
ar
M 04
ar
M 05
ar
M 06
ar
M 07
ar
M 08
ar
M 09
ar
-1
0
ar
M
Property prices & rental rates q/q increase
20%
Property price index
Rental index
15%
10%
5%
0%
-5%
-10%
-15%
-20%
Sources: SCB Global Research, CEIC
Jul, 2010
Jan, 2010
Jul, 2009
Jan, 2009
Jul, 2008
Jan, 2008
Jul, 2007
Jan, 2007
Jul, 2006
Jan, 2006
Jul, 2005
Jan, 2005
Jul, 2004
Jan, 2004
Jul, 2003
Jan, 2003
Jul, 2002
Jan, 2002
Jul, 2001
Jan, 2001
Jul, 2000
Jan, 2000
Jul, 1999
Jan, 1999
Jul, 1998
Jan, 1998
Jul, 1997
Jan, 1997
Jul, 1996
Jan, 1996
Jul, 1995
Jan, 1995
Private residential transaction value now well exceeds 1997, but still below
2007
Residential property monthly transactions value (SGD mn)
10000
8000
6000
4000
2000
0
Sources: Standard Chartered Research, CEIC
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 antispeculative measures implemented in May 1996
Forecasts
Source: Real Estate Developers' Association of Singapore (REDAS)
Singapore private property price index AFTER the antispeculative measures implemented in May 1996
Source: Real Estate Developers' Association of Singapore (REDAS)
China
A super-cycle of world GDP growth
Actual world GDP growth
Average world GDP growth
10%
8%
1946-1973: 5.0%
6%
1870-1913: 2.7%
2000-2030: 3.6%
4%
1820-1870: 1.7%
2%
0%
1973-1999: 2.8%
-2%
-4%
1913-1946: 1.7%
-6%
-8%
-10%
'1820
'1840
'1860
'1880
1900
1920
1940
1960
1980
2000
2020
Sources: Maddison, IMF, Standard Chartered Research
Emerging markets dominate by 2030
Nominal GDP 2010, USD 62trn
% of global
Nominal GDP 2030, USD 309trn
% of global
US
12%
EU-27
27%
US
24%
EU-27
14%
CIS
5%
Japan
3%
ROW
5%
Latam
9%
CIS
3%
MENA
6%
Japan
10%
Latam
6%
SSA
5%
MENA
3%
SSA
2%
China
23%
ROW
6%
Asia ex CIJ
India
6%
3%
China
10%
Sources: IMF, Standard Chartered Research
Asia ex CIJ
8%
India
10%
Sources: IMF, Standard Chartered Research
Monetary conditions are very loose
Select economies real interest rates
%
-2.6%
-1.6%
-0.2%
-0.8%
UK
-1.9%
-0.4%
Euro area
South
Korea
China
-0.9%
US
Hong Kong
India
-2.1%
+1.8%
Brazil
Singapore
+2.2%
Indonesia
Australia
+2.0%
Note: This map is for illustrative purposes only and is based off 3 month interbank rates minus annualised CPI;
Source: Standard Chartered Research
Ongoing inflow into emerging markets
The stimulus is ending
The CNY 4trn package: official
Healthcare,
Innovation
Welfare housing
education, culture
1%
7%
4%
Enviromental
conservation
9%
Rural
infrastructure
9%
Roads, railways,
airport, power
grids
45%
Earthquake zone
25%
Outstanding investment project growth stabilising
New project, y/y %, 3mma
Total project under construction, y/y %, 3mma
60
40
20
0
-20
2005
2006
2007
2008
2009
2010
Sources: CEIC, Standard Chartered Research
Fairly easy monetary policy…still
New lending growth under control
Short term and bill finance, RMB bn
Medium and long term, RMB bn
1,200
1,000
800
600
400
200
0
-200
-400
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Household mortgage demand strong
Corporates
Households
1,800
1,500
1,200
900
600
300
0
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Sources: CEIC, Standard Chartered Research
Wages up, incomes up
Migrant wages, real growth, CNY, y/y %,
Urban incomes rising, too
Disposable income, real, y/y %
Consumption expenditure, real, y/y %
18
25%
16
20%
14
12
15%
10
8
10%
6
4
5%
2
0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
2003
2004
2005
2006
2007
2008
2009
2010
Sources: CASS, CEIC, Bloomberg, Standard Chartered Research
Bubbles in China
House prices, average Selling Pries (ASP), CNY per sqm sold
Beijing
Haikou
Shanghai
Tianjin
Shenzhen
Xian
Hangzhou
Wuhan
Guangzhou
Chengdu
30,000
25,000
20,000
15,000
10,000
5,000
0
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Sources: CRIC, Standard Chartered Research
A Chinese luxury wedding
Sources: OMG
Policy mistakes in the west
Unemployment in the US in 5 recessions
% of workforce vs weeks from start of recession
Interest rates and inflation in Europe and the US
%
Euro area (inflation)
3M Euribor
7.5%
6.5%
5.5%
US (inflation)
3m USD Libor
5
4.5%
3.5%
4
2.5%
1.5%
0.5%
3
%
-0.5%
-1.5%
2
-2.5%
Negative real rates
In the US
-3.5%
-4.5%
1
-5.5%
37
35
33
31
29
27
25
23
21
19
17
15
13
11
9
7
5
3
1
-6.5%
0
Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10
Mar-53
Jul-74
May-81
Mar-90
Nov-07
Policy mistakes in the west
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