Housing and Mortgage Markets in the SEACEN Countries

This report reviews the current development of housing and mortgage market in the SEACEN region; identifies factors influencing housing prices and rents as well as the mortgage markets; and attempts to better understand the interactions among housing and mortgage markets with other economic variables and with respect to financial stability. The study also recommmends measures to develop the housing and mortgage markets that will be sustainable and beneficial to the conduct of monetary policy. The study finds that rapid growth in housing and mortgage markets in the SEACEN region is mainly due to a rapid growth of population and urbanisation, benign economic environment, increased per capita income, and rapid economic growth. In terms of policy, while different countries have different policies to support housing, in general the main premise of government policy has been to support housing solutions, especially for the poor. Thus governments have largely focused on low-cost housing. The middle and high-cost segments of the market have been mainly market determined. According to available literature, the principal factors affecting housing price include household incomes, interest rates, household formation or other demographic variables, supply side variables, financial market institutions and credit availability, taxes, subsidies, and other public policies directly related to housing. Empirical results of some SEACEN countries are consistent with this view. The Malaysian country paper pointed out that housing price are determined by real income per capita, people's expectations on future income and economic outlook, demographic characteristic factor, real lending rates, and total loans outstanding in the banking system. Using the Granger Causality Test, the Taiwan country paper showed that real GDP, M2 and stock prices influences housing price with several quarter lags. The study by Chen and Patel in 2002 showed that the strongest factor determining housing price is the household income. A 1% increase in household income will lead to increase in housing price by 1.88%. Meanwhile, on the supply side, 1% increase in the construction cost will increase the housing price by 0.70%. Thailand's country paper also found evidence of a strong causal link from monetary policy to property prices. An increase in the policy rate raises short term interest rates which in turn increase the cost of loans and reduce the demand for credit by both developers and consumers. This consequently decreases housing demand and investment which in turn contributes to a fall in property prices. The link between housing markets and other parts of economy operates mainly through the impact of housing price fluctuations, as they represent the main source of household wealth. Private consumption and investment, and hence output growth, were affected through wealth and balance-sheet effects. Sharp falls in housing prices led to a large-scale deterioration in asset quality and in the profitability of the banking industry, particularly for those banks that were deeply involved in housing or housing-related lending businesses. They undermined the value of bank capital, reducing the banks' lending capacity, and in the extreme case could jeopardise the stability of the financial system as a whole. Empirical evidence in Malaysia suggested that house price move closely to the real output of the economy. The strength of this correlation had increased since the Asian financial crisis, from positive 0.6 in 1997 to positive 0.8 in 2004. Using the Granger Causality Test, Taiwan pointed out that house price causes CPI inflations, M2 and bank loans rates. However, experience of some countries have shown that the impact of housing price on the macroeconomy could be limited. In a study done by Meng in 2002, it was found that the fluctuations in private residential housing prices do not play a very significant role in Singapore's economy. There are several reasons for this: (i) housing market in Singapore is dominated by public housing, (ii) public housing prices are controlled by the government, (iii) anti-speculative measures introduced in 1996 have reduced homeowners' ability to cash their capital gains when prices rise and also reduced the risk of negative equity when prices fall, (iv) less dependence on the domestic financial system as a source of financing due to the significant presence of multi national corporations in Singapore, (v) and Singapore's highly open global trade. The study also suggested that capital markets could provide an attractive and potentially large source of long term funding for housing, for both developers and investors. Besides financial institutions, developers can take advantage of the capital market as an alternative source of funding. Investors can also diversify their investment portfolio to property funds besides bond and debt instruments. In this regard, the recent rebound in global economies has facilitated further growth in domestic bond markets as well as asset-backed securities in many countries. Securitisation provides a vehicle for mobilising long term savings and is thus very helpful in stmulating domestic housing markets. In addition, securitisation can help broaden the institutional investor base, increase transparency and deepen domestic bond markets.