Property bubble builds as we price our boom for gloom

Our property section on Wednesday featured a revealing contrast of optimism and pessimism, one that goes some way to explaining why we are in such a fix on housing costs at the moment. On page 4, it featured three headlines - (1) Huge demand sustains Bangkok boom, (2) Property mania brewing in Malaysia, and (3) Singapore prices to keep rising. On page 5, it also featured three headlines - (1) US faces grim choice over owners as home sales and prices plummet, (2) Canada's cooling market may avoid crash, and (3) British prices fall quicker than expected and building slows. There is no doubting the property boom across Asia. Only in Japan, mired in a slump that started in 1990, are home prices still retreating. Everywhere else, the state of the property market ranges from firm to outright booming. There is also no doubting the property slump in the world's richest economies. In the US, the southwestern states show signs of holding up but that's desert and on both coasts the slump continues to be severe. In Europe, it is not only Britain where prices are falling and construction slowing. The European Central Bank's figures show it is happening right across the European Union. This is also the first time that Europe has seen such a general slump since the start of ECB annual figures in 1981. As to Canada, I keep my fingers crossed. I own investment property in British Columbia's capital city, Victoria, and I have not yet seen much cooling. But then Victoria is also Canada's retirement capital, the warmest, sunniest place in the entire country and I expect no cooling. For more promotion of Victoria here, just ask. Feel free. I don't think this pattern of Asia being at odds with other major markets is entirely coincidental. In fact, it is partly the slump in the other markets that is causing the boom in Asia. What we have here is a Europe and America that for various reasons of easy money, lax oversight and government stimulus overbuilt housing and in 2008 encountered the beginning of the inevitable correction. The official response to this correction has been to apply more of the measures that caused the overbuilding - easy money, government stimulus and lax oversight obscured by casting blame on commercial banks for the failings of government agencies. As those headlines on Wednesday testified, it isn't working very well and may not work at all. Japan's experience since 1990 with these kinds of corrective measures has certainly not been a happy one. Japan is in some ways the reluctant world leader in this sort of slump. Things are different in the rest of Asia, however. In most Asian countries, certainly the ones with more open markets, a mid-1990s property bubble ended in a resounding pop with the Asian financial crisis of 1997. The present buoyancy of Asian markets dates back at earliest to 2003 and the initial recovery was tenuous. The period has not really been long enough for Asian countries to have worked up the property silliness that characterised the US until three years ago. Why then the growing complaint across the region, not just in Hong Kong and the mainland, that housing costs have gone past reasonable affordability levels? The answer is that interest rates, the key determinant of affordability in housing, are a good deal lower in most of Asia than one might expect for the present state of Asian economies and property markets. And they are that way because Asia takes its lead in interest rates so heavily from the US dollar and the euro. It can be done directly, as in Hong Kong's peg to the dollar, but more often indirectly as a matter of central bank policy. Thus we have interest rates appropriate to a bust property market in markets that are not bust at all. The sad result is runaway prices that leave people behind. Just look at the chart of Hong Kong's three-month interbank offered rate this year - low, very low, right throughout but with some indication in May that rates would go up. That lasted until the end of June and then the rates went down once more. We couldn't keep it up against the pressure from America. That's what is sending our property market through the roof at the moment. We have priced our boom for gloom and as a result we have a bubble forming.