Monetary tightening in the next few years - globally and within the region - will gradually bring to an end the ideal conditions that have supported housing markets over much of the last decade. However, tightening is unlikely to be enough to trigger a sharp correction during 2018. Moreover, stable economic performance and prudent underwriting standards are likely to help contain increases in arrears as mortgage rates rise. We forecast arrears in most APAC markets to remain below 0.5%. The impact is likely to be slightly more pronounced in Australia and New Zealand as house-price growth stabilises, especially in big cities. Household debt is high in both countries and most mortgages have flexible rates, which leaves borrowers more exposed to faster-than-expected interest rate rises.
Regulators have taken steps to contain price rises in most of APAC's major markets in recent years. There were signs of these steps gaining traction in 2017 in the main hotspots - Australia, New Zealand and China - where price growth slowed from the double- to single-digits.
China's authorities implemented the most effective regulatory intervention in the region last year, reflecting strong control over the market. Tougher rules on home purchases and mortgage loans - particularly in higher-tier cities - slowed price gains dramatically. We expect most restrictions to remain in place, and forecast price appreciation of just 1% in Tier 1 cities, down from 1.5% in 2017 and 27% in 2016. Downside risks to prices are low, as there is now considerable pent-up demand.
Several APAC markets will soon start to feel the impact of China's limits on overseas foreign-currency transfers. Australia and New Zealand have attracted particularly strong Chinese investment. Australia has placed its own limits on foreign, non-resident buyers, while we expect New Zealand to introduce restrictions this year.
We forecast house-price growth across Australia's eight capital cities to slow to 2%, from 5% in 2017. Low interest rates and high population growth are likely to support prices, but rising supply, falling rental yields, tighter lending standards, foreign-ownership restrictions, and income growth lagging cost of living increases will dampen price gains.
In New Zealand, strong population growth and sluggish housing construction - particularly in Auckland - are likely to result in continued supply shortages, despite regulatory tightening. We expect house-price growth to pick up, but only slightly, to 3.0%.
Further tightening of mortgage-lending standards, particularly in Seoul, and gradual interest-rate hikes are likely to weigh on Korea's housing market. We forecast prices to increase by 0.8%. In contrast, the Bank of Japan is likely to continue its ultra-loose monetary policy, which will support housing demand. Nevertheless, low affordability suggests price growth is set to slow - we forecast an increase of 2%, versus 4% in 2017.
Singapore's housing market recorded its first price rise in almost four years in 3Q17, and we forecast price growth to accelerate to 4%. Measures that curbed speculation are likely to remain in place, but a wave of new supply is now receding, while the earlier price correction has improved perceived value. Singapore is the only APAC market where we have a stable/positive outlook; our outlook for all the others is stable.
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