Till Debt Do Us Part
Excess debt and excess liquidity are at the heart of almost all financial crises, and it is probably not too far from the truth to suggest that these are the CAUSES of financial crises, not merely a result. In a great many instances real estate is at the core of such crises, with a great deal of the preceding liquidity and debt being applied to the development and sale of real estate assets. Sometimes it is the supply side of the industry that gorges on debt, sometimes the demand side, and sometimes both.
Excessive, poorly managed property lending is at the root of the current global financial mess.
Sometimes Debt Crisis is Driven by Real Estate Consumers, Sometimes by the Supply Side, Sometimes both.
The current financial crisis in the US and some other western nations (UK, Ireland and Spain) ties back to lending to real estate. In the US, it was more to the consumer via mortgage lending than the developer community this time around. Similarly in the UK. In both of these markets the developers and large scale property owners have emerged relatively unscathed from the crisis as they did not load up on debt in the same ways that they have sometimes done in the past, and the way the consumer did in the recent cycle..
In Ireland it was a mixture of both, but more importantly large scale debt was accumulated in the hands of sometimes less than salubrious developers and large scale property investors. Spain’s massive building boom, often to service the needs of foreign buyers flocking to beaches and golf courses, led to a debt surge to the developer community. Loan problems are more focused on this end of the real estate industry than the end users and household sector through the mortgage markets.
In this episode it was excessive debt on the demand side of the equation that proved more of a problem than lending to the supply side of the real estate spectrum.
Going back in time a little, the Savings and Loan crisis in the US in the late 1980’s/early 1990’s was a rather different kettle of fish from the recent property induced financial mess. On that occasion it was lending to the larger developers and investors that went into a tailspin. There was not a huge problem in the residential mortgage part of the real estate industry, very much different from this time around. But the scale of the lending funk that time around was tiny by comparison to the black hole that emerged in the current mortgage led crisis.
In the Asian financial crisis of the late 1990’s it was both excess debt at the consumer level as well as at the corporate/developer level in countries such as Thailand and Korea. But in countries such as the Philippines and Indonesia the property debt problems lay primarily at the corporate level. For Hong Kong and Singapore, debt levels were not such an issue for either the developer community nor residential home buyers. The developer community in these countries had learned a hard and bitter lesson on debt in the boom and crash of the late 1970’s/early 1980’s when the developer set went into a property market crash of around 70% carrying typical debt/equity ratios of 100% and more. But despite there being no systemic debt problems in either Hong Kong or Singapore, both their asset markets plunged via contagion effects and liquidity tightened significantly in both markets as banks faced serious problems in other regional markets.
The Asian Financial Crisis of the late 1990’s was characterised by greater lending excesses to the developer community. For many countries lending to households proved less of a systemic problem.
Despite a fall of around 60% in residential prices in Hong Kong (and a bit less in Singapore), non-performing mortgages rose only to a level of around 1.3%. Families kept on servicing their mortgage despite approximately 12% - 15% of privately owned homes being in negative equity. Singapore’s situation was similar.
The experience of the banks in the Asian financial crisis also differed from country to country. In Thailand and Indonesia in particular, banks faced major non performing loan problems and looked to their respective governments for support. This also was the case in the Philippines, but to a lesser extent. For Singapore and Hong Kong banks passed through the crisis without enduring major systemic problems. An earnings problem, perhaps, but not so much a balance sheet and solvency problem. This was probably due to decent lending standards and risk management, together with watchful central banking regulators directing the system through “moral suasion”. Also corporate balance sheets in the property sector carried relatively low gearing, with much less debt than their similarly placed cousins in the US, UK and Australia typically carried.
Hong Kong and Singapore suffered less in the AFC than other Asia countries—their real estate developers were lowly geared and households kept servicing their mortgage debt despite 50-60% falls in house prices.
Now we are five years into the current global debt/financial crisis, it is perhaps worth taking a look at where Asian countries and particularly hard asset markets stand on the debt front. Are there systemic risks developing in the region through lending to the real estate sector, both the supply side and the demand side?