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Opinion
The View
by Nicholas Spiro
The View
by Nicholas Spiro
Asia’s housing market pain: why Japan could be next
- China’s property crisis is just one of many signs that Asia’s housing sector troubles are far from over
- Japan could be in for a shock if a shift from years of ultra-loose monetary policy pushes up lending rates, hitting home loans hard
For most of this year, signs of resilience in many housing markets in the Asia-Pacific region were increasingly apparent. Despite the dramatic rise in interest rates and mounting economic and geopolitical headwinds, home values recovered faster than anticipated.
Australia led the way, as prices in capital cities began to rise as early as February following a 7.5 per cent decline since April 2022, just before the Reserve Bank of Australia launched its aggressive monetary tightening campaign. Home values hit a fresh all-time high last month, according to data from CoreLogic.
Even in New Zealand and South Korea – two markets that have suffered most because of a rapid surge in prices after the pandemic erupted – home values have begun rising again. This recovery in prices is part of a global trend.
According to an index compiled by Knight Frank, while prices fell in annualised terms in the second quarter of this year in nearly 40 per cent of 56 markets surveyed, only around a third of the countries witnessed declines on a quarterly basis, pointing to an improvement in market conditions this year. The combination of tight supply, strong labour markets and effective macroprudential regulations helped avert a crash.
Yet, there are other signs that suggest the housing market pain in Asia is by no means over. The most extreme example is China, where the residential property market never recovered following a policy-induced price correction that began in the second half of 2021.
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Boom, bust and borrow: Has China’s housing market tanked?
Boom, bust and borrow: Has China’s housing market tanked?
While other major housing markets are plagued by chronic undersupply, China is contending with years of oversupply. The correction, moreover, is not just cyclical but also structural because of shrinking demand stemming from an ageing population, a falling birth rate and, crucially, the government’s efforts to shift away from investment towards consumption.
Although the forced deleveraging in the property industry has reduced the sector’s contribution to China’s gross domestic product, the scale of the delays in the delivery of unfinished homes for which buyers paid upfront is staggering.
According to Nomura, there are 20 million units of incomplete “pre-sold” homes which, it claims, is equivalent to 20 times the size of Country Garden Holdings – China’s largest private developer by sales which defaulted for the first time in October – at the end of last year. Nomura believes that “at some point next year, the issue of home delivery might turn into a social stability issue”, forcing Beijing to bail out troubled developers.
Even in far more stable housing markets across the region, the recovery is faltering or was snuffed out some time ago. In Australia, prices fell in three of the eight capital cities last month, including Melbourne, and are starting to resume their decline in Sydney.
A combination of sharper-than-expected rises in interest rates, a further deterioration in affordability, low levels of consumer confidence and fears about a recession has led to a renewed slowdown. “The factors that have supported value growth are losing their potency,” CoreLogic noted.
In Hong Kong, they were never potent in the first place. Having recovered briefly in the first quarter of this year, the Centa-City Leading Index – a gauge of second-hand house prices – has dropped more than 10 per cent since early April, taking its decline since the August 2021 peak to about 21 per cent.
While the dramatic mainland-driven fall in Hong Kong’s stock market – which historically has been closely correlated with house prices – was a factor, the mispricing of interest rate risk in the United States was the main culprit. As an importer of the US Federal Reserve’s policy through its currency peg to the US dollar, Hong Kong was hit hard by the rapid unwinding of bets that US rates would fall this year.
Even in Singapore, prices and transactions have slowed sharply. Although the slowdown is much more pronounced in the more expensive core central region – where foreigners, who have borne the brunt of the government’s cooling measures, are more active – a reversal in the demand-supply balance has taken the heat out of the market. OrangeTee & Tie expects sales of private homes to fall to 16,000-19,000 units next year, half their level in 2021.
Why Singapore’s residential property market is not about to hit the skids
Why Singapore’s residential property market is not about to hit the skids
Yet, the housing market in Asia that could be in for a shock is Japan. Asia’s second-largest economy has been insulated from the fallout from monetary tightening as the Bank of Japan (BOJ) has stuck with its ultra-loose policy despite a sharp rise in inflation. Even so, it has given its strongest hint yet that it could scrap the world’s last negative interest rate regime sooner than markets expect.
An end to negative rates in itself would not necessarily cause mortgage rates to rise. But if rates turn positive, this would push up short-term prime lending rates, putting upwards pressure on floating-rate mortgages that account for roughly 70 per cent of Japanese housing loans.
The stakes are high. Tokyo flat prices have risen sharply, leaving them on a par with their level at the peak of the asset price bubble. Other cities in Japan have also witnessed rapid growth in home values since 2019, fuelled by super-cheap mortgages. JPMorgan expects “a well-signalled transition to exiting negative rates”, but the BOJ has gained a reputation for springing surprises. A botched exit could hit the property market hard.
Housing markets in the Asia-Pacific region are a mixed bag. Many have proved more resilient than anticipated, yet signs of renewed slowdowns and deeper downturns are evident. For Japan, the pain may still be to come.
Nicholas Spiro is a partner at Lauressa Advisory
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