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Asset bubbles may be avoidable after all, Asian results show

Years after the biggest global financial meltdown since the Great Depression spurred debate over how policy makers can head off asset bubbles, tentative evidence is emerging from Asia-Pacific economies that prudent regulation can prove effective.

[SYDNEY] Years after the biggest global financial meltdown since the Great Depression spurred debate over how policy makers can head off asset bubbles, tentative evidence is emerging from Asia-Pacific economies that prudent regulation can prove effective. 

From Singapore to Sydney to Seoul, regulators have implemented prudential rules that target house-price inflation at the same time as they deliver stimulus to their economies through monetary policy. As the list of countries dropping rates toward zero lengthens, macroprudential measures, once out of favor in the developed world, are staging a comeback.

"Asia has been a pioneer in macroprudential measures," said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. "Ideally the region would've had higher interest rates in recent years to cool down speculative pressure, but that wasn't possible. So this was a substitute and early signs are it seems to have worked."

The crux of the debate over macroprudential measures harks back to an argument from former Federal Reserve Chairman Alan Greenspan that a central bank could clean up the mess from financial excesses, not prevent it.

But following the US housing bust and freezing up of global credit markets in 2008, such a laissez-faire attitude became increasingly untenable. The conundrum of cheap money pouring into real estate in Asian economies as the Fed lowered its benchmark rate to near zero demanded action. 

Singapore led the response, introducing residential property curbs in 2009. These included: a cap on debt repayment costs at 60 per cent of a borrower's monthly income; higher stamp duties on home purchases; and increased real estate taxes. 

Hong Kong acted in 2010 and in subsequent years, introducing: a special stamp duty on properties resold within two years, later lengthened to three; an additional 15 per cent tax on purchases by foreigners and corporations in 2012 in response to overwhelming demand from mainland Chinese buyers; and a doubling of the progressive ad valorem rates in February 2013 to a maximum of 8.5 per cent. 


Prices in both jurisdictions are now falling with Singapore registering a ninth consecutive quarterly drop in December while secondary residential prices in Hong Kong dropped 6.9 per cent in the fourth quarter.

Adair Turner, chairman of the UK Financial Services Authority until it was disbanded in 2013, said city-states like Singapore are now international property markets and using interest rates alone would do some "pretty weird things" to their economies.

"It takes a hell of a lot to control an out-of-control property boom with an interest rate," he said in Singapore on Tuesday. "To deal with them monetary authorities and regulators need an array of tools and powerful macroprudential tools."

Elsewhere macroprudential measures weren't embraced so quickly. Australia's central bank Governor Glenn Stevens was reluctant to reimpose them, arguing that they were scrapped Down Under from the 1980s because people always found a way around them.

"As an economist you always regard macroprudential rules as second best," said Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd, reflecting on Mr Stevens's views. "You always prefer to raise interest rates and let the market sort itself out. But in the exceptional circumstances that the world has found itself in the last few years, they do seem to have proven their worth."

Across the Tasman Sea, New Zealand's central bank moved faster. In October 2013, it told banks that only 10 per cent of their portfolios could be composed of home loans with low down payments.

It relaxed that limit to 15 per cent in November for everywhere except Auckland, where prices continued to rise. It also required investors buying in the country's largest city to have a deposit of at least 30 per cent of a property's value to qualify for a mortgage. 

Australia succumbed to the inevitable as prices in its two biggest cities rocketed amid record-low rates. In December 2014, the banking regulator urged lenders to limit growth in mortgages to 10 per cent a year and in July last year it gave the four largest banks a year to increase the average capital they hold against mortgages to 25 per cent from about 16 per cent.

The measures forced Australian lenders to raise mortgage rates for property investors in July and for owner-occupiers in November, the first such increase in five years. That led to a 2.3 per cent fall in Sydney home prices in the quarter ending Dec 31.

In South Korea, regulators last year imposed stricter lending standards to curb swelling household debt and from as soon as February most new home buyers will have to take out amortised loans instead of those with interest-only payments.

Fitch Ratings is forecasting a sharp deceleration in house- price growth in Australia and New Zealand and a further fall in Singapore. It cited prudential measures as among the reasons, as well as very high prices that make housing increasingly unaffordable for owner-occupiers.

Macroprudential measures "had been a feature of policy in the US and many other industrial economies in the 1950s, '60s, and '70s, and it has remained a key aspect of the regulatory approaches in many emerging market economies in the 2000s," Donald Kohn, an external member of the Bank of England's financial policy committee and a former vice chairman of the Fed's board of governors, said in a speech in October.

"In the wake of the GFC, macroprudential regulation has been reborn in advanced economies."

Still, it's not a case of uninterrupted success. In the UK, house prices continue to climb, fueled by a reduced supply of properties coming onto the market, a reality that even macroprudential measures can't resolve.

But the reality is that more countries may experiment with macroprudential rules given the International Monetary Fund has downgraded global growth for this year and several central banks, including New Zealand's, are unwinding rate increases that proved too tough for their economies.

"Central bankers are going to have to keep interest rates extremely low for some time to come," said Mr Oliver. "The best way to deal with it is macroprudential controls."


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