Macro-prudential lessons from Asia Alex Barrett 2 nd November 2010.

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


-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


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


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


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

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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

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


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


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

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Macro-prudential lessons from Asia Alex Barrett 2 nd November 2010.

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