Inflation drags down Asian markets

The Nation

Asian property markets, though still relatively unaffected by the credit crunch, will soon be affected by inflation and higher interest rates, because of rising food, fuel and other commodity prices, warns the Global Property Guide.

The Global Property Guide is an online property research house.

"Higher food, fuel and other commodity prices affect the housing market negatively in several ways," Global Property Guide senior economist Prince Christian Cruz said.

"At the micro level, households may postpone their decision to purchase a new house or spend on renovation if they anticipate higher prices. At the macro level, higher food and fuel prices push inflation up. Monetary authorities typically raise key interest rates to stem inflationary pressure," Cruz said.

Asian households are particularly vulnerable to the recent rise in food prices. The price of rice has risen by more than 90 per cent during the last year up to last month, according the UN Food and Agriculture Organisation (FAO).

The price of other foods has also risen significantly. Wheat was up 160 per cent last month year on year; soy bean oil by 104 per cent, corn by 37 per cent and sugar by 26 per cent.

Food prices are a key component of the Consumer Price Index (CPI). Their proportional weightage ranges from 28 per cent in Singapore, 33.2 per cent in China, to almost 50 per cent for urban workers in India.

High food prices will persist until the next year, according to reports by FAO, the World Bank and the International Rice Research Institute.

The price of almost all commodities is increasing. The price of light sweet crude oil surged to US$117 (Bt3,690) a barrel this month, up almost 80 per cent from a year earlier. NYMEX crude oil has been above $100 per barrel since last month.

Many Asian economies have recently experienced residential real-estate price surges such as China (Shanghai) where the housing price increased 35.43 per cent, Singapore by 31.18 per cent, Hong Kong by 24.95 per cent, the Philippines by 15.15 per cent, Japan by 8.40 per cent and South Korea by 3.08 per cent.

Meanwhile, most analysts said the key rates might be raised next month if inflation continues to be above the official targets.

Fears of interest-rate hikes rose in several Asian countries, particularly in Indonesia and China.

High interest rates affect housing markets in two ways, namely, discouraging investment and consumption, causing the economy to slow down, thus reducing people's willingness to spend on housing.

They also discourage borrowing for housing loans.

"The situation is unfortunate because most Asian housing markets have not yet fully recovered from the effects of the 1997 Asian financial crisis," Cruz said.

"Even with strong house price gains last year, property prices in Asia are still below their pre-Asian crisis peak levels.

Despite the 31-per-cent nominal rise in the overall residential property price index, Singapore's prices are still about 10 per cent to 20 per cent below their pre-Asian crisis peak level in real terms," he said.

"In the Philippines, even with the 15-per-cent increase in condominium prices in 2007, it is still about 47 per cent below its peak level in real terms," Cruz said.

The housing markets most likely to be affected by monetary tightening seem to be China, India, Singapore, the Philippines and Thailand, which have experienced the largest increases in inflation.

 "With global financial markets interconnected, the world's economies tend to move together. The synchronicity was observed with the global housing boom - never before in recorded history did so many countries experience such house price growth at the same time," he said.

"The housing market slowdown may also be synchronised," he said. "Inflationary pressures are likely to cause Asia's central banks to raise interest rates and slow down their housing markets," Cruz said.

      At a glance

n At the micro level, households may postpone their decision to purchase a new house or spend on renovation if they anticipate higher prices.

n Asian households are particularly vulnerable to the recent rise in food prices.

n Markets most likely to be affected are China, India, Singapore, the Philippines and Thailand.