Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Strategy Overview: Asia Equity
Fig. 8: Hong Kong: Affordability vs mortgage lending
rate
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Jan-94
Jun-95
Nov-96
Apr-98
Sep-99
Feb-01
Jul-02
Dec-03
May-05
Affordability ratio (LHS)
Oct-06
Mortgage lending rate (RHS)
Source: Centaline Property Agency, CEIC, DBS Vickers
Mar-08
12%
10%
China: We don't see a bubble across the board in China as the
nationwide affordability ratio is still lower than that in 2005
when most people viewed property prices as affordable.
However, some cities, such as Beijing, Shenzhen, Tianjin did
see affordability ratios rise to a level much higher than in 2005.
Having said that, housing prices in these cities are still more
affordable than those in 2007. As China statistics tend to
underestimate household incomes, we would believe actual
affordability is better than the reported numbers.
Jul-09
Fig. 9: Affordability ratio by different cities in China
Basd on price of
Jul 09 2007 2005
China 44% 52% 49%
Shanghai 61% 66% 61%
Beijing 89% 75% 61%
Shenzhen 53% 75% 45%
Tianjin 58% 57% 51%
Hangzhou 61% 72% 58%
Chengdu 46% 55% 45%
Chongqing 29% 38% 31%
Guangzhou 53% 67% 51%
Wuhan 47% 62% 49%
Source: CEIC, Soufun
8%
6%
4%
2%
0%
Singapore: Based on our affordability ratio calculations, where
we assume a 30-year loan tenure at an average 5.5% interest
cost (vs current rates at under 2%) for a 110 sqm mass-market
condominium unit, affordability still remains reasonable (about
40% of monthly income for the 85th percentile household)
even with a 20% increase in home prices from trough levels.
We have also assumed that household incomes fall 10% in
2009 and show zero growth in 2010. This is still a much
healthier ratio as compared to during the pre-Asian Financial
Crisis housing bubble.
Fig. 10: Singapore affordability ratio
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
Source: DBS Vickers
Credit
1996 1998 2000 2002 2004 2006 2008 2010F
Median Price of Mass Condo (LHS)
% Household Income for Mortgage (RHS)
65%
60%
55%
50%
45%
40%
35%
30%
25%
Economic bubbles are often referred to as credit bubbles as
credit is easily made available to everyone and deflated
through a subsequent tightening of credit. What we have
found in Asia is that credit growth is still way below past crisis
levels except for China where this year's credit growth has
been phenomenal and a credit tightening is on the cards. Our
China banking analyst believes that a slowdown in China's
lending growth in the second half of the year is consistent with
seasonality and should not be a major concern. Government
officials have clearly stated the "moderately loose" monetary
policy will remain, and only market tools (instead of
administrative measures) will be used when conducting
"dynamic fine-tuning". We believe market tools to be used
include open market operations or even mild hikes of RRR and
interest rates. While guidelines to ensure loans are directed to
the real economy are possible, administrative controls such as
loan quota policy is unlikely.
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