Sun, Aug 08, 2010 page8

• EDITORIAL : Real-estate surge raises questions

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  Does a suddenly cooling housing market pose an immediate threat to highly leveraged construction companies or will a plunge in property prices sink domestic banks?

  While the government continues to assure people the housing market is generally sound, despite the rising prices seen in some major cities, recent moves taken by the financial and monetary regulators have all the hallmarks of a pre-emptive attempt to cool the market, while also sending a clear message that they are serious about the issue.

  Over the past few weeks, the Financial Supervisory Commission (FSC) has rejected fund-raising plans submitted by some listed construction companies, citing the firms’ high debt ratios and inadequate information to justify the plans.

  While FSC reservations about these companies does not necessarily mean they will be unable to raise funds, whether to purchase more land or strengthen cash-flow, the fact that they are seeking to raise funds via a rights issue instead of requesting loans from banks invites inevitable speculation about their financial situation.

  A key question is whether the banks have exercised adequate caution when providing loans to construction companies. If they have, the curbing of property speculation lies in the hands of lenders rather than the FSC.

  However, it appears that banks’ loan activities have not been substantially impacted by the central bank’s recent credit-tightening measures. This is evident from the fact that the level of construction loans in Taiwan has risen since January and totaled NT$1.126 trillion (US$35.4 billion) in June, up 2.19 percent from a month earlier and 10.3 percent higher than a year ago, according to the latest data from the central bank.

  Since March, the central bank, the FSC and the Ministry of Finance have unveiled various measures to curb rising housing prices. Last month, the central bank even asked domestic banks to take steps to prevent speculation on existing houses following complaints from the pubic.

  Despite such concern, these measures have only caused a slight decline in the sale of existing houses in recent months and house prices in general have not dropped accordingly. Consumer housing purchases and renovation loans actually climbed 4.26 percent to NT$5.771 trillion in June from a year earlier, more or less the same as the previous month, according to the latest official data.

  Little wonder then that the FSC is taking a greater interest in bank loans. The local media recently reported that the FSC has asked domestic banks to conduct stress tests to determine the credit risk posed by consumer and corporate lending. The reports said that the regulator has demanded that lenders gauge the impact of a worst-case scenario wherein property prices drop by between 20 percent and 25 percent, with the test results to be submitted by Sept. 15.

  The stress test is intended to provide an early indicator for the risk management issues faced by banks given the continued rise in housing and construction loans in the first half of this year. What matters is not the absolute size of the loan provisions each bank may have to set aside, but their abilty to survive a plunge in property prices.

  Assuming a price decline of up to 25 percent, instead of the 60 percent plunge assumed by the regulator in China, suggests that the FSC is not expecting property prices to fall that far in Taiwan. The message being sent is that the regulator will continue to introduce whatever measures it deems necessary to maintain healthy growth in the domestic property sector.
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