Axa IM constructed an overall vulnerability score to see the impact of the US rate rise on the Asian housing markets, based on factors such as the degree of house price misalignment, the level of housing debt and the size of capital inflows.
The fund house said emerging Asia has had a pronounced rise in housing prices due to an increase in capital flows following the global financial crisis.
Five markets overvalued
Axa IM’s model showed five of the eight markets are currently overvalued. Hong Kong leads with a 20% overvaluation.
Hong Kong’s vulnerability comes from a large house price overvaluation combined with a strong foreign credit infusion, while Malaysia is at risk because of its fast leverage increase, the report said.
It is followed by Philippines and Malaysia, with house prices 16% and 11% above their respective fair values.
India and Indonesia are moderately overvalued at around 5%.
In contrast, house prices in Korea, Thailand and Singapore are currently undervalued up to 7.5%.
Household Debt
All countries, except India, experienced an increase in household debt as percentage of GDP. For instance, Singapore’s total debt-to-GDP ratio reached 80% in 2013, up 10 percentage points from 2008, driven mostly by housing-related leverage.
Thailand’s debt level reached a similar level to Singapore’s, but most of the debt was accumulated in non-housing sectors.
“The lack of a housing credit increase explains why Thailand’s house price growth has lagged behind its peers.”
Axa noted that the housing markets in Singapore, Thailand and Korea are currently undervalued and hence are the least vulnerable from the perspective of house price misalignment.
“However, should the Fed’s policy exit cause turmoil in emerging Asia similar to that during the taper tantrum in mid-2013, housing markets in the region could all take a hit regardless of their initial valuation,” the fund house added.
Axa mentioned two caveats: the analysis is not a prediction of market correction, but simply identifies areas of vulnerability in Asia’s real estate markets and it does not consider domestic policy changes that could offset external liquidity tightening on the housing market.
Impact on GDP
Hong Kong faces the largest potential GDP decline (3%) if house prices reverse back to their fair value. The Philippines will experience a similar adjustment if the 16% price misalignment is fully unwound.
The negative GDP impacts are more tepid in Indonesia, India and Malaysia, given the problems of house price overvaluation are less severe.
Korea, Thailand and Singapore face positive adjustments, because their housing markets are currently undervalued.
Liquidity boosts asset prices
Asia’s housing markets have been among the major beneficiaries of the unconventional liquidity tools used by the global central banks following the global financial crisis. This has boosted the global liquidity, lowered rates and lifted emerging market assets, including real estate, the research noted.
Axa IM cited the data from the Bank for International Settlements (BIS), which showed growth in nominal house prices ranged from 17% to 130% between 2008 and 2013, with an average increase of 52% for the region.
