In the second quarter of last year, Australian house prices hit an all-time high, having staged a spectacular recovery since the Covid-19 pandemic erupted in March 2020. The combination of huge government stimulus programmes, rock-bottom interest rates, a strong labour market and the virus-induced “race for space” caused home values to soar in the face of the economic turmoil inflicted by the pandemic. At the time, National Australia Bank, which compiles a quarterly residential property survey, expected the growth in prices in Sydney and Melbourne – the largest and priciest housing markets – to slow sharply this year, but to still rise 3-4 per cent, partly because it expected interest rates to remain unchanged until 2024. Fast forward one year, and the bank admits it was caught out by a market that “turned slightly quicker” than it anticipated. According to its latest survey, published last month, prices in Sydney and Melbourne will remain flat this year, and will contract by more than 11 per cent in 2023. A number of factors are at play, but the one weighing on sentiment the most right now is the strikingly hawkish pivot by the Reserve Bank of Australia (RBA), which raised rates by a much-sharper-than-expected 25 basis points on May 3 and signalled the most aggressive tightening campaign since the 1990s. The RBA’s abrupt policy shift is part of a rapidly accelerating worldwide move away from easy money to counter the surge in inflation. It is also the latest demonstration of a more forceful attempt to address financial risks stemming from overheated housing markets and high levels of household debt. In the Asia-Pacific region, these vulnerabilities have become more acute since the start of the pandemic. A gauge of mainstream residential prices produced by Knight Frank shows that three countries – New Zealand, Australia and South Korea – were among the world’s eight fastest-growing housing markets last year, each of them registering blistering price gains of between 18 and 23 per cent year on year. Central banks in all three countries are now increasing rates, adding to a slew of macroprudential and tax measures aimed at reining in house prices. New Zealand’s central bank, which began increasing borrowing costs last October, warned last week that a sharp correction in home values remained a “plausible outcome”. South Korea’s government, which has already introduced over two dozen measures to try to head off a speculative bubble that has caused the average price of a flat in Seoul to more than double since 2017, faces an even bigger challenge. Housing policy has become dangerously politicised , having been mired in corruption scandals and undermined by unpopular measures that have riled homeowners and first-time buyers alike. Yet, while higher borrowing costs, which are driving up mortgage rates, are compounding a long-overdue slowdown in Asia’s property markets, there is little to reason to expect a crash. For starters, this is not 2008. Lending to uncreditworthy borrowers is limited, banks are better regulated and labour markets are in much stronger shape. Even in South Korea, where the house price-to-income ratio, especially in Seoul, has surpassed its level in the run-up to the global financial crisis, lending remains concentrated among individuals with high credit scores, the International Monetary Fund noted in a report published in March. Moreover, the bigger the vulnerabilities and the greater the exposure to real estate, the more determined governments and regulators are to avert a disorderly decline in home values. Tim Lawless, research director at CoreLogic in Sydney, said the RBA is sensitive to the indebtedness of Australia’s household sector, making “the risk of a material popping of the [housing] bubble quite small”. Second, structural factors linked to demographics and migration continue to underpin demand for housing. Rapid urbanisation rates across the Asia-Pacific region are fuelling the growth of metropolises, proving a boon for property markets. The pandemic has also breathed new life into smaller, less glamorous, cities – particularly in Australia. Strong interstate migration, coupled with more affordable prices, have helped insulate Australia’s regional capitals from the slowdown in housing markets. While home values in Sydney just recorded their third straight month-on-month decline, prices in Adelaide and Brisbane grew 1.9 per cent and 1.7 per cent respectively last month, data from CoreLogic shows. Third, and most importantly, long-standing supply constraints are keeping prices elevated. Even though housing affordability has deteriorated sharply in many leading Asian cities, supply is relatively “inelastic”. Stronger demand for homes has translated more into higher prices as opposed to increased supply, partly because of the regulatory and tax treatment of real estate. Singapore’s housing shortage threatens to fuel rising prices The pandemic has exacerbated supply bottlenecks. Even in Singapore, which benefits from a strong public housing system, virus-induced delays in construction have helped drive up prices further. OrangeTee & Tie, a Singaporean property adviser, noted that persistent supply chain disruptions could result in cost pressures becoming a more important determinant of price increases this year, with the housing market shifting from demand-driven to cost-led price growth. What is clear is that higher borrowing costs alone are unlikely to take much heat out of the Asia-Pacific’s housing markets. Not only are rates rising from extremely low levels, the forces that have driven prices higher are more potent, and are set to persist for some time. Nicholas Spiro is a partner at Lauressa Advisory