The View | How higher inflation and rising interest rates will test Asia’s buoyant property market

Asia’s real-estate sector benefits from relatively strong fundamentals and reliable demand that should limit any fall in prices

Given huge demand for home ownership and the large amount of capital waiting to be deployed, Asian property should continue to perform well

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Apartments for sale in Shah Alam, Malaysia, on July 2. Crucially, the medium-to-long-term prospects for Asia’s property markets remain attractive. Photo: Bloomberg

Published: 6:45am, 19 Jul 2022

At the start of this year, most parts of Asia’s property sector were performing well. Even some of the more vulnerable segments of the market were still growing. In Australia, whose overheated housing market was starting to cool, home values in Sydney and Melbourne continued to rise on a year-on-year basis in January, underpinned by rock-bottom interest rates.

In the commercial sector, transaction volumes in the first quarter of this year were higher in annualised terms in most major markets in the region. Moreover, rental yields in the popular industrial and logistics sector continued to decline.

Yet, as the second half of the year gets under way, the picture is markedly different. The sudden and sharp rise in borrowing costs triggered by the ultra-hawkish pivot by the US Federal Reserve has driven up mortgage rates, increased companies’ cost of capital and prompted a repricing and reappraisal of assets that are steering Asia’s property market into uncharted waters.

Several Asian central banks are behind the curve in battling inflation and are being forced to raise rates more aggressively than expected. Not only is it unclear how high rates will go, there is uncertainty over the severity of a policy-induced economic downturn. “Right now, the cost of debt is top of mind. We’re past peak pricing,” said Greg Hyland, head of capital markets Asia-Pacific at CBRE.

The residential market is repricing the fastest. A report by Standard & Poor’s published on June 16 singled out New Zealand, Australia and South Korea as the most exposed because of developed economies’ greater sensitivity to moves in rates and excessively high household debt.

Average rates on long-term fixed-rate mortgages for new owner-occupiers and investors in Australia have jumped to between 4.1 and 4.5 per cent, a full percentage point higher than at the start of this year.

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.css-1m2rp1p{color:#34b8b5;}The View | How higher inflation and rising interest rates will test Asia’s buoyant property market

The View | How higher inflation and rising interest rates will test Asia’s buoyant property market