Churchouse Letter
December 2010         by Peter Churchouse

Inflating Asset Markets Creating Economic and Political Headaches

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In This Report:

  • It is indeed a bi-polar world where governments and central bankers in the emerging markets are struggling to deal with asset price inflation and those in the developed world are desperately trying to cope with lingering deflationary forces and sub-par economic growth.
  • Market mood swings are variously moving from deflation concerns, sovereign risk, to un-abashed pleasure at the US Fed’s guarantee to pump yet more dollars into the global economy in a “we will do what it takes” attitude to pushing the US economy back on track.
  • Our guess is that rising inflationary pressures globally in the areas of food and commodities together with renewed concerns on sovereign debt in many developed world markets will lead to higher longer term interest rates (already being seen in the steepening of the US yield curve in recent weeks). Asia will not be immune from this.
  • Asia’s attempts to cool asset price inflation with monetary and administrative measures will be given a helping hand by a global rise in key longer term interest rates.
  • Rising housing prices in Asian markets and the potential social and political effects of worsening affordability are at least partially behind government tightening policies.
  • Our study here of housing affordability in core markets in Asia looks at the affordability of what we might call “entry level” housing rather than using average or median prices that most studies of the subject consider. The average or median house price tells us that about 50% of all houses are sold at prices substantially less than the average.
  • In some countries the difference in percentage of households who can realistically afford an “entry level” property versus an “average” price property is very substantial. Hong Kong, Beijing and Bangkok are examples of this phenomenon.
  • Housing affordability is best in Singapore, which should be hardly surprising when as much as 80% or so of all housing is provided by government in a very controlled environment. Kuala Lumpur and Australia also stand out well in the affordability stakes.
  • In Hong Kong, where affordability is a hot topic in local media and political circles, we determine that 50% – 60% of households can realistically afford an entry level apartment, which is roughly in line with the long term average.
  • Affordability is definitely aided by record (or near record) low interest rates around the region but also strong economic growth, improving employment conditions, wage increases and excellent liquidity in local banking systems.
  • But rates will only rise from here, and this will undoubtedly worsen affordability levels. The question is whether such rises will cause a slowdown, or reversal of recent upward property price trends. There are plenty of examples in Asia of prices continuing to rise in a rising interest rate environment and vice versa. Real interest rates are probably a better guide.
  • China property stocks (listed in Hong Kong) have been punished by investors who have been concerned by government cooling measures. So far just about all the major residential developers have reached or exceeded their sales target for 2010. Stocks are at the low end of their valuation ranges, both in terms of PE ratios (many in single digit PE’s), with 2010 earnings growth of 20% – 35%, much more in some cases and most are trading at 20% – 50% discount to underlying net asset value (NAV). Bell weather stocks such as China Vanke and China Resources Land will likely lead the charge in any return to favour in the sector.
  • In Singapore, developer stocks have also been out of favour as government has introduced property market cooling measures. Office focused property companies have performed much better. Again, any sign of easing of cooling measures may have a positive impact on stocks such as CapitaLand Ltd, and smaller stocks such as Wing Tai, HoBee and Allgreen.
  • In Thailand residential developers focused on the cheaper end of the market soared on ending of the troubles in Bangkok in May 2010, but have given up a great deal of their gains in the latter part of the year. Companies focused on the cheaper end of the market (i.e. more affordable) are selling their product well enough and are producing decent earnings growth at reasonable valuations. Companies such as LPN Development and Preuksa Real Estate fit into this category.

Approximate Percentage % of Households Able to Afford Average Price and 'Entry Level' Housing (Based on December, 2010 Interest Rate and Rates up 2.5% from December 2010 Rate).

At this stage of the year it is hardly new news that Asian governments and central banks have been facing rather different problems compared to those of most western nations. It really is a bi-polar world when half the world is frantically pursuing policies to lift economies from the grip of potential deflation and governments in a huge part of the global economy are desperately initiating policies to slow asset prices and staunch the flows of liquidity that are driving prices. For the latter, it is possible to conclude that governments in markets such as China over-reacted to the global financial crisis that unfolded so dramatically with the collapse of Lehman Brothers in 2008, by promulgating an unfettered “go forth and lend” mandate for the country’s banks. It is also probably fair to conclude that emerging markets have also been big recipients of liquidity generated in western nations.

Asia is awash with talk of “hot money”. This to me seems a very emotional term, and one which hungers for definition. What does it actually mean? No one I have asked has been able to provide a definition. But it is claimed to be a major factor in rising property prices around Asia as well as commodities and stock markets. “Hot money” at least seems to evoke money that is in and out, chasing assets and a home, short term in nature, footloose capital seeking quick returns, buy fast and sell quick. To the extent that this forms part of a definition of hot money, then it does not seem to apply to investment in certain assets such as property. Real estate, almost by definition is a long term asset that cannot necessarily be traded quickly. So to claim that asset markets such as real estate are being driven by offshore “hot money” seems to be at odds with reality. First is the question as to how much offshore money is actually being invested in real estate markets in Asia. No one really knows but in markets such as Hong Kong, which is claimed by many media buffs as being driven by hot money flows, the total amount of “foreign” money invested in residential real estate in the past year is well below 10% of the total value of all sales and purchase transactions. For Singapore probably the same is true. For commercial real estate in both these cities, the foreign component may be similar or even less. In China, the foreign investment component is well under 5%, and probably less than 1%.


The reality is that real estate markets in Asia are driven very largely by domestic demand which is currently well supported by domestic liquidity and low interest rates, genuine end user demand.


How is this going to change going through 2011 and into 2012?

Market sentiment has been driven back and forth through big swings in 2010 by some big macro forces. First, markets were being buoyed by massive injections of liquidity in 2009 by just about every government and central bank around the world in probably what was the first ever almost globally coordinated attack on a global economic and financial crisis. Markets rallied on the realization that the world economic order was not going to sink beneath the seas and drown us all.

Then the cost of all this short term help together with the cost of the buildup of debt during the good times led markets to focus on the mountains of debt underlying many European economies, and the risk of sovereign default. This brought markets to a shuddering halt – for a while. Focus on government debt around the world dominated market thinking through the middle of the year.

And then, once again, it was Ben Bernanke to the rescue with his August comments alluding to another round of quantitative easing in the US, and what’s more, the commitment to keep on doing whatever it takes to get the US economy up off its bottom and back to something like normal again. By that we are supposed to assume, falling unemployment rate and a pickup in house prices, or at least a substantial slowing of foreclosures and NPL’s in housing.

Markets took heart, and the focus on sovereign debt has receded from the driving factor of markets. Risk is back on the table and the S&P 500 has rallied almost 23% since its early July low. Major European markets have also rallied 16% – 22%, with the Euro Stoxx 50 up by close to 13%.


At some point in the coming months, the markets are likely to focus once again on the scale of sovereign debt problems besetting Europe with possibly a few more additions added to the fear list.


One of the interesting features of the very recent Bernanke fueled rally in equity markets has been the sharp rise in long term bond yields in the US and other markets also.

What is Mr. Market telling us here? That QE2 and its other variants will lead to inflationary pressures, therefore arguing for higher rates. Or that sovereign risk is increasing and governments will likely need to pay higher rates to compensate for that risk. While there is little actual inflation risk in most developed markets right now (unlike many emerging markets), the pressures can be seen. Food prices are rising sharply in many emerging markets as are labour and many material costs. Export oriented countries will at some point pass these costs on to consumers in the west.

And there is little doubt that sovereign debt default risk is now much higher on investor agendas than it was a year ago.

For us, with our focus on investing in hard assets, particularly in Asia, we cannot put our heads in the sand proclaiming “Asia is different”. A pattern of rising long term sovereign bond yields is likely to play through into higher longer term rates generally around the world, not just for sovereigns but for everyone else as well.

Many markets in Asia are in rate raising mode anyway as inflationary pressures rise and a desire to curb lending is increasing.


With respect to housing, many governments are facing internal pressures to improve housing affordability in a climate of rapidly rising residential prices, and at a time when the general direction of long term interest rates, while at record low levels right now, are likely to head higher further damaging affordability.



The conundrum that governments face is that low interest rates regimes have been a factor in rising home prices which have worsened affordability. Now with the prospect of rising interest rates, affordability is likely to worsen further – unless rises in rates are offset by falls in home prices. Governments are loathe to deliberately engineer falling home prices – homes are owned by voters after all, and even in countries like China where the ballot box does not guide policy, the authorities are only too aware of the dangers of deliberately alienating large swathes of the public who have been actively encouraged by their government in the pursuit of home ownership.

While there may be much noise surrounding claims of poor affordability in many markets, it is worth taking a slightly deeper look at housing affordability.

Many measures of affordability look at average or median house price against average or median household income. While this a convenient, single data point measure, it does not take account of the “reality” of affordability at the entry end of the market. It is complaints from aspiring first time buyers, those wanting to climb on to the first rung of the housing ladder that policy-makers often claim to be addressing.


The entry level house buyer is not likely to be pitching at property priced at the mid end of the market – the average or median price. The “Average” price can be hugely distorted by a relatively small number of very expensive transactions. Equally, the median price tells you that 50% of properties are transacted at lower prices than the median.


Similarly, entry level buyers may not be the “average” income earners.

Hence we here try to look at the pattern of household income across the society, and test affordability of lower end housing, something that might be more the target of entry level buyers. For example it is probably unlikely that the entry level buyer in London is targeting a three bedroom house in Kennsington, much as he/she might like to! Something in a more remote suburb is probably more likely to be on the first time buyer agenda. The same can be said of most cities. In Hong Kong for example, while upper end housing in inner-city locations may be priced at HK$130,000/sq m (or more) – US$16775/sq m – perfectly good modern apartments can be bought in some of the new towns in the northern and western part of the territory at between 25% and 35% of that price. The situation is similar in Singapore, Shanghai, Beijing – most major cities around the region.


Much affordability work focuses on “average” or “median” house prices. Focus should be on “entry level” housing which by definition is well below “average” prices. The question policy makers should instead be addressing is what proportion of the population can realistically service a mortgage on an “entry level” residential property.



Our analysis tries to determine roughly how much of the population has the income to support purchase of an entry level type of property. The analysis looks at the ability to service a mortgage in each market. This analysis does not address at all the other issue of affordability – the ability to save/acquire the down payment. This can vary quite significantly across markets. For example, in Hong Kong the typical down payment required from a buyer is 30% with mortgage typically at 70% of the value of the property. In markets such as Bangkok and New Zealand, buyers can obtain a 90% mortgage typically, and therefore need a much smaller down payment.

At the higher end of the market, affordability is, or probably should be, less of a policy concern to the authorities.

We have been able to derive household income distribution data and house price data at a level of accuracy that we think at least serves to indicate broadly the proportion of families in these market that can realistically afford a property at the entry end of the housing scale.

Table 1 presents the core data for the markets we have been able to look at. Hong Kong and Singapore are probably the most transparent property markets in the world with excellent “real time” data available on property prices as well as mortgage terms and household income distributions.

The table identifies:

  • Typical mortgage conditions in each market – Loan to Value (LTV ratios) and average mortgage rates.
  • Average house price for each market.
  • An assumed “entry level” price which is always lower than the average price. For most markets we know from our own observations and data sources what prices are at the lower end of the market for a typical smaller house or apartment. In some cases we adopt a value 25% lower than the average.
  • The monthly mortgage payment required for each type of property is calculated for each market.
  • The level of monthly income that is required to afford such a property assuming a maximum of 40% of income is allocated to mortgage repayment.
  • As noted above, the analysis does not address the down payment aspect of affordability. Much lower down payments are required in some market where LTV’s are much higher.

Core Housing Data of Target Markets circa December 2010. Target Markets: Australia, Bangkok, Beijing, Hong Kong-Prime, Hong Kong-HIBOR, Kuala Lumpur, New Zealand, and Singapore. Data Includes: Loan-to-Value, Mortgage Rate, Average House Price, Assumed 'Entry Level' House Price, Price per square meter (sqm), Price per square foot (sq ft), Monthly Payment using 'Entry Level' House Price, Monthly Income Required (if max 40% is used to pay monthly mortgage), House Price Source Data, Household Income Source Data.


The charts here show the cumulative income distribution curve for each market and plot the percentage of households who could afford to service the mortgage on an entry level apartment or house.

Singapore demonstrates probably the best affordability in our universe with almost 80% of households able to afford a 3 room Housing Development Board (HDB) apartment (see Figure 2). Perhaps this should not be too surprising given that this government agency by far outweighs the private sector in terms of housing production with the HDB routinely producing 70% – 80% of all new housing in Singapore. Pricing is largely government determined and aimed at providing affordable housing for the populace at large. Housing provision in Singapore is very largely a government led function.

Singapore Housing Affordability circa December 2010 (Percentage (%) of Households vs Average Monthly Household Income (S$)). Affordability determined by % of households which can afford flats with a maximum of 40% of income used to pay for the mortgage.


Interestingly affordability looks pretty good in Kuala Lumpur, Malaysia at the entry level with about 75% of the population able to afford a typical entry level property in that city (see Figure 3).

Kuala Lumpur Housing Affordability circa December 2010 (Percentage (%) of Households vs Average Monthly Household Income (RM)). Affordability determined by % of households which can afford flats with a maximum of 40% of income used to pay for the mortgage.

Australia Housing Affordability circa December 2010 (Percentage (%) of Households vs Average Monthly Household Income (A$)). Affordability determined by % of households which can afford flats with a maximum of 40% of income used to pay for the mortgage.


Australia, with more than 70% of households falling within the housing affordability net, enjoys good affordability (see Figure 4).

Auckland in New Zealand, a country where home ownership is almost regarded as a natural right, exhibits rather poor affordability with only about 55% of households able to afford a lower priced home (see Figure 5). This finding is echoed by earlier work undertaken by Demographia that we reported on some time ago.

Bangkok also ranks rather poorly on housing affordability with only about 40% of households able to service a mortgage on a typical low priced unit costing about Bt2.5 million, this being well below the average price in that city of about Bt4.26 million (see Figure 6).

Although authorities in China have been adopting a raft of policies aimed at slowing down the domestic housing market, it is clear that about 70% of households can still afford a typical lower end apartment in Beijing, where such properties sell for about Rmb7,000/sq m or about Rmb560,000 for an 80 sq m apartment (see Figure 7). Government has been actively encouraging developers in the construction of apartments in the 70sq m range in an attempt to increase the supply of affordable housing.

New Zealand Housing Affordability circa December 2010 (Percentage (%) of Households vs Average Monthly Household Income (NZ$)). Affordability determined by % of households which can afford flats with a maximum of 40% of income used to pay for the mortgage.

Bangkok Housing Affordability circa December 2010 (Percentage (%) of Households vs Average Monthly Household Income (Baht)). Affordability determined by % of households which can afford flats with a maximum of 40% of income used to pay for the mortgage.

Beijing Housing Affordability circa December 2010 (Percentage (%) of Households vs Average Monthly Household Income (RMB)). Affordability determined by % of households which can afford flats with a maximum of 40% of income used to pay for the mortgage.

Hong Kong Housing Affordability circa December 2010 (Percentage (%) of Households vs Average Monthly Household Income (HK$)). Affordability determined by % of households which can afford flats with a maximum of 40% of income used to pay for the mortgage.


There has been much noise in Hong Kong emanating from various politically motivated interest groups concerning housing affordability. The reality is that about 60% of households can afford a typical entry level apartment based on the use of HIBOR based mortgages and a bit more than 50% assuming the more traditional prime rate based mortgage (see Figure 8). (1) According to our work on affordability that tracks data over more than 35 years, affordability in Hong Kong is pretty much spot on the long term average, but has clearly worsened in the past year or so as prices have risen.

Figure 1 ranks the affordability picture for the markets concerned showing the percentage of households who can afford an entry level property, an “average” property, and also an entry level property assuming interest rates rise by say 250 bp.

Clearly affordability in the region is very much helped by record low interest rates. A rise of 250 basis points(bp) has a significant impact on the percentages of households in our universe who can realistically afford the entry level type of property.


We conclude from this work that for many markets in the region, housing affordability is still not too bad, but clearly with prices in many markets rising at rates of 20%pa or even more, governments and central banks are showing some concerns about worsening affordability.



With interest rates at record low levels, and central banks reacting already to rising inflationary tendencies, interest rates are much more likely to rise than fall in most markets. Add to this the potential global concerns regarding sovereign debt risk, and the possibility of higher longer term interest rates globally, then the desire to slow asset price appreciation in the region is increasingly understandable. It was excesses in property lending that created the global financial crisis, and central banks and governments in the region are keen to ensure it does not happen again in this region, at least on their watch.

(1) Footnote. In Hong Kong residential mortgages have traditionally been based on the relatively stable bank Prime Lending rate which is currently in the range of 5% – 5.5% depending on which bank one is dealing with. Currently most prime based mortgages are in the range of Prime minus say 2.5 % or thereabouts, equating to a mortgage rate of around 2.5% – 2.8%. In the past year or so, banks have been offering residential mortgage based on the local HK Interbank Offered Rate (HIBOR). While this rate can be very much more volatile than the prime rate, it is very low at present with mortgage being offered at HIBOR plus 70bp – 100bp common. This has equated to mortgages of around 1% – 1.3%.

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