It can be said without doubt that the seeds of the global crisis were laid in the property market in the US. Once that bubble burst, the rest they say is history. The impact was so huge that the ripples of the same were felt across the globe.
It has been more than a year since the crisis deepened. And the picture that emerges in the US and Asia are in stark contrast. While property prices in the US are still in the doldrums, those in Asia are beginning to look frothy. In Asia particularly, China is a strong example. With the aim of bolstering the Chinese economy, banks there went on a lending spree. A lot of money was pumped into the property markets. Real estate prices soared and prices ran ahead of fundamentals. Fearing inflation, the Chinese authorities since then have clamped down on property markets. And this in turn is expected among other factors to slow down the growth in China in the second half of the year. But the statistics very clearly point out that Asian property prices have grown strongly than their Western counterparts.
For instance, as reported in the Economist, China, which saw a decline of 1% in prices in 1QCY09, saw the same rise considerably by 12.4% in the first quarter of this year. Singapore, Hong Kong and Australia saw strong growth rates of 38%, 28.5% and 20% respectively in 1QCY10. This after taking into account the declines in prices in the corresponding period last year. This has then compelled governments in Asia to take various steps to curb speculation such as raising interest rates and down payment requirements, imposing stamp duties on all residential properties sold within a year of purchase among others.
The same cannot be said of the US though. The Economist has stated that evidence points to a renewed housing slowdown there. For instance, the national housing index fell during the three months to the end of March. The more recent home-sales data in the US have been downbeat. Sales of new homes declined by 33% from April to May due to the expiry of a tax credit. Further, just 28,000 new units were sold during May, the lowest total on record for that month.
In India, meanwhile, the cost of real estate continues to remain expensive in many parts of India. This is primarily due to the cost of land. Equitymaster's founder Ajit Dayal had stated recently that direction of real estate prices will in large part depend upon the close connection between politicians and real estate companies. Unless and until that gets broken, the chances of prices heading significantly lower appear remote. In India especially, the demand for real estate is palpable as many people do not still have their first home. But the problem is also on the supply side. While there has been no shortage of land per se, only limited land is being sold because of zoning rules.
Indeed, economic growth in various countries determines to a large extent in which way property prices are headed. With Asia growing much stronger than the West, the rise in property prices is hardly surprising. But letting prices reach unjustifiable levels will only sow the seeds of another housing crisis. This time in Asia.