Is the property bubble going to burst anytime soon?

10 years after the Asian financial crisis, Asia's real estate markets are bubbling again, led by Singapore. Given the key role overheated property played in that crisis, it bears asking, to what extent the current exuberance is a cause for concern this time around.

According to the Global Property Guide, Singapore experienced Asia's highest residential property price increases last year, with housing prices rising 9.5% in real terms (although this masks higher percentage increases in prime market segments). Quite likely, it will be a similar story 2007 as well. Real estate markets in China, India, Korea and the Philippines have also witnessed sharp run ups - and in those countries too, prime segments have seen double digit price increases in percentage terms. Indeed, more and more real estate funds and other institutional investors are pouring money into Asian property. Some element of speculative activity is also evident.

How much should we worry about all this? In a study on Asia's real estate markets in April, the IMF took a generally sanguine view - albeit with qualifications. It pointed out that while property prices have been rising more rapidly than inflation, most Asian countries 'are not experiencing unusually rapid housing price hikes'. It noted that in many cases, the increases follow on the heels of extended declines (about eight years, in the case of Singapore). Moreover, housing prices have not risen exceptionally, compared with other asset prices. On average, housing price increases have run ahead of income gains in about half the 12 countries covered, but these average prices might mask affordability problems for some segments of the population.

Apart from income gains, there are other reasons for property price run-ups: the proliferation of mortgage products and a rise in mortgage credit - especially in China and India; higher non-speculative foreign demand for housing and commercial space (which is true in Singapore as well) as well as an element of speculative capital inflows - though less than that in the 1990s.
Given that the run-up in real estate prices represents a rebound after several years of decline or stagnation, it does not, as yet, create cause for concern. The fact that institutional investors are far more active players in Asia's (and particularly Singapore's) property markets this time than they were in the 1990s is also reassuring. They introduce an element of stability and resilience because they have greater financial holding power than individuals, and are less likely to engage in panic selling.

However, having said all that, policymakers and banking regulators across the region need to be vigilant to ensure that lending standards do not become overly relaxed and that housing lenders are adequately provisioned against what the IMF calls 'a reasonable worst-case scenario of falling house prices'. The degree of household indebtedness - particularly in those segments of the population who are vulnerable to income shocks - is also an indicator that bears watching. But as of now, it is difficult to make the case that there are sufficient danger-signs to warrant government intervention in the market with the aim of bringing property prices down.