Asian banks have largely escaped the worst of the global debt crisis but housing market downturns, especially in China and India, still threaten to pile up bad loans and slow the region's economy.
After property crashes burned Japanese and Southeast Asian lenders in the 1990s, they have been more cautious. So falling home prices are much less of a risk than in the United States, where the subprime mortgage meltdown brought down several leading banks.
Asian banks tend to limit loans to 70 percent of home prices, compared to between 80 percent and full value in the West. And few mortgages are securitized, let alone twisted into the kind of complex investment packages that went toxic as U.S. homeowners defaulted.
But just as in the U.S. and Europe, property booms in Asia are turning to slowdowns, and even busts. With half the wealth of Malaysia, Singapore, South Korea and India tied to property, according to CLSA, the potential impact on banks and economies is wide.
"There'll be a drag on economies," said Leland Sun, founder of Hong Kong-based Pan Asian Mortgage Company Ltd.
The Asian Development Bank cut its 2009 economic growth forecast for Asia to 7.8 percent in mid-September from 7.2 percent, but the global financial crisis has deepened since.
After strong run-ups, Hong Kong and Singapore home prices are widely tipped to fall 15 percent next year as job cuts hit Asia's main financial centers.
In South Korea, unsold homes are at a record high, prices are falling and small construction firms are vulnerable. India's property boom fizzled into a price drop of a third this year in some cities, and analysts expect the same in 2009.
But the biggest risk of property loan defaults is in China.
Developers are slashing prices to stem a sales slump, and dragging the whole market. As in the United States, homeowners could flee if they owe banks more than their property is worth.
"People are very mobile and hard to find," said Sun, whose firm sponsors mortgage securitization. "It'll be a real issue."
"IN TROUBLE"
Ironically, many of the property industry's woes stem from Beijing's efforts to cool the market and fend off a crash, by a clamp-down on loans to developers and rules to deter speculation.
A perfect storm swelled up. Home sales plummeted, first in overheated Guangzhou and Shenzhen in the south, then elsewhere.
In response, China's biggest property firm, China Vanke, dropped prices by a fifth at projects in Hangzhou and Shanghai and other developers have gone further.
Reflecting the problems, bonds from firms including Shimao Property have slumped on concerns over possible default, as credit ratings agencies downgraded them. Chinese developers sold over $3.6 billion worth of bonds to international investors in 2006 and 2007, according to Thomson Reuters data.
In India, similar events are unfolding, with local media reports saying banks are tightening lending for property after total credit grew 26 percent this year.
Axis Bank, Yes Bank and HDFC Bank have the biggest exposure to developers, at around 12 percent of loans. And just over a quarter of loans at ICICI Bank are residential mortgages.
"Developers are in trouble in India and China because they took on high gearing to expand land banks," said Aaron Fischer, Asia property analyst at CLSA. "You'll see some bankruptcies."
The situation is so dire in China that economists expect the government to back peddle, and fast, fearing the ruin of a property industry that accounts for a quarter of total investment and 10 percent of gross domestic product (GDP).
Local authorities have already stepped in, with Nanjing promising homebuyers a subsidy and letting developers delay payments for land.
SLIP-SHOD
The Chinese government needs to bolster public confidence that after a correction of say 30 percent, property prices will fall no further, said Ting Lu, China economist at Merrill Lynch.
"It's a serious risk to China's economic growth," Lu said.
"A year ago China needed to tighten policies to ensure safety of the banking system and to bring down inflation," he said. "But who could have expected a global financial crisis like this?"
But as long as mortgages are new to Asia, around for only a decade in some countries, they present less of a risk than in the West.
Home loans represented only 19 percent of GDP in Japan, 12 percent in China and 5 percent in India, according to CLSA figures for 2007. In the United States, the ratio is 105 percent.
Developers in China and Vietnam describe how homebuyers will turn up at sales offices with sacks of dog-eared bank notes.
In China, for example, new mortgage lending accounted for only a third of the $300 million of new home sales in 2007.
But Chinese banks have been slip-shod in their lending practices, said Pan Asian's Sun.
At nearly $800 billion, loans to homebuyers and developers have jumped to 18.3 percent of the total at Chinese commercial banks from 13.5 percent in 2005.
Bad loans in the banking system stand at 5.6 percent of the total, but economists cite anecdotal evidence that defaults on property loans are creeping up.
"There's not very good underwriting," Sun said. "It's asset-based lending, they don't look at ability to repay."
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