Property can still bruise Asia's banks and economy

By Dominic Whiting, Asia property correspondent - Analysis

HONG KONG (Reuters) - 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.