Almost a decade after the Asian crisis, the mortgage markets of several Asian countries are in much better shape and are poised for expansion.
Increases in capital, the consolidation of banks, and increases in foreign ownership and participation are spurring growth, according to a report released by the Global Property Guide.
(Research available from Why Asia missed the global house price boom )
The decline of state ownership of banks and the shift of government housing agencies to mortgage market “enabler” instead of direct providers of mortgage loans have paved the way for the expansion of the private sector. Most countries have also started to offer mortgage default insurance for lenders
Asia’s property markets are now growing and banks are more willing to extend mortgage loans around the region. The positive benefits could include stronger house-price growth - and more investment in housing.
While property prices in much of the developed world are currently at historic peaks, property prices in most Asian countries are well below peak levels. Asia’s housing markets have lagged for three main reasons:
- The Asian Crisis caused a long period of high interest rates. Potential property purchasers did not want borrow at the interest rates being offered.
- Post-crisis bank portfolios were full of defaulted property loans. Banks were, till recently, often reluctant to lend.
- Poor credit information, weak legal systems, lack of transparency, high revenue extraction by governments (transfer taxes, registration fees) have raised the costs of housing investment in many Asian countries.
Mortgage markets in Asian countries are also relatively small, particularly Indonesia (2% of GDP), China (10%), Philippines (12%) and Thailand (16%). Only Singapore and Hong Kong have mortgage markets generally at par with most developed countries, with mortgage debt at 61% and 48% of GDP, respectively. Even OECD member countries Japan and South Korea have relatively small mortgage markets, given their level of economic development.
“The small size of Asia’s mortgage markets means there is huge potential for growth,” says Prince Cruz, senior economist of the Global Property Guide.
“For instance, if China’s mortgage market were to increase to 20% of GDP in 2010, the market will be worth more than US$700 billion. Given the strong growth of China’s mortgage market and economy, this scenario is not unlikely,” says Cruz.
Despite the recent interest rate hikes since, mortgage rates are still affordable in most of Asia, below 8%. This should turn the adjustable rate mortgage (ARM) structure typical of Asian loans into an advantage, making borrowing comparatively inexpensive.
In some Asian countries, the long period during which loans were effectively unavailable means that supply is low, and rents are relatively high, leading to good rental investment returns for investors - as in Indonesia, Thailand, and the Philippines.
The result could be a virtuous circle.
Low interest rates will foster an active mortgage market, aided by pent-up housing demand, which in turn will boost economic activity. A vibrant economy is good for the housing market.
Healthy mortgage markets are a critical factor in the growth of housing markets. With Asia’s mortgage markets now in better condition, the stage is set for further reforms which will provide the financial underpinning for better housing financing, more attractive pricing, more varied product offerings, and generally, the provision of more housing at lower cost to Asia’s citizens.
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