Everyone knows the role played by housing bubbles in the pre-crisis booms that ended in spectacular crashes in the United States in 2008, as well as in other countries like the UK and Ireland, and then Spain. But many commentators still persist in seeing this as more of a developed economy problem, which is less likely to become a concern in developing countries where excess demand for housing remains an issue.
In fact, however, it is just as possible for debt-driven private consumption bubbles to burst in developing countries – and several developing country financial crises have resulted from precisely that in the past. The experience of the Asian financial crisis in 1997-98, in which excess private indebtedness played a big role in causing the crisis in South Korea and Thailand, had provided a salutary lesson to most of developing Asia in the subsequent decade.
So it could have been expected that allowing excessive private credit expansion, especially for private retail credit for housing, automobiles and other consumption, is something that would be anathema to Asian countries, especially those that had already gone through one round of devastating financial crises. Yet, in the aftermath of the Great Recession of 2008, many Asian developing countries actually encouraged the growth of consumer credit bubbles as a means to more rapid recovery, accentuating a process that had already been eased by financial liberalisation from 1999 onwards.
The result has been an explosion in heavily leveraged consumption as well as in residential real estate activity, even in economies where wage incomes have not increased that much, such as the Republic of Korea. And the impact has been most strongly felt in the housing market. From early 2009, residential prices in several Asian economies soared dramatically for at least two years.
This has been most evident in Hong Kong, where house prices have more than doubled since early 2009. In 2012, when global residential real estate prices increased by around 4 per cent, prices in Hong Kong rose by 24 per cent. It is now the most expensive place on earth, with property prices significantly higher than in New York, London or Shanghai. By contrast, the authorities in China have been working to quell the frothy housing market ever since early 2010, and to some extent they seem to have succeeded, as average house prices have remained largely flat for the past two years.
In some other countries in East Asia, house prices have tapered off or even started declining, independent of any policy nudging, but simply because the bubble has finally burst. This is clearly evident for Taipei itChina and Malaysia but even in South Korea and Indonesia, the rate of increase has come down significantly. Elsewhere, even in places where the prices continued to increase, they did so at a slower rate, including in India's Mumbai, where the rate of increase was still quite high.
But while the rapid increase in residential real estate prices clearly suggested housing bubbles in many Asian countries, the bursting of the bubble need not be good news, and can have painful consequences. As in the US housing market before 2007, most of the increase in real estate prices in these Asian economies was debt-driven, resulting from the rapid expansion of retail credit to households, which in turn dominated in total personal debt.
The most substantial increase has been in Hong Kong, which is also home to the frothiest property market of them all. The household sector is already facing personal debt crises in several countries, credit to the private sector increased dramatically in many of these economies most notably South Korea, Malaysia and Thailand. And this is turn is already acting as a drag on the economy, as households that increasingly find it difficult to service their debts are forced to deleverage and cut consumption.
So this is a bubble – or rather, a set of bubbles – waiting to burst. Indeed, some are already in the process of bursting.As these factors cause consumer spending to slow down, this is already affecting companies, and causing their debt to become more difficult to service. The corporate bond market, which had become incredibly buoyant in emerging Asia in the recent past, is also becoming a cause for worry.
All this makes the East Asian region's economies ever more vulnerable to external shocks. But with these levels of indebtedness, the shocks that cause the next round of damage may even come from within.
Full article: http://www.thehindubusinessline.com/opinion/columns/c-p-chandrasekhar/the-asian-housing-bubbleburst/article4756617.ece
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