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30-06-2014, 08:02 AM
Asset inflation is the main demon as oppose to the traditional measure of inflation...
'Worrying signs' of bubble in real estate, credit boom
BIS report signals growing risks in many countries
Published on Jun 30, 2014 1:25 AM
ZURICH - Regulators should not dismiss "worrying" early signs of unsustainable property price and credit growth, which could leave borrowers vulnerable to interest rate rises or sharp downturns, the body bringing together the world's central banks has warned.
The Bank for International Settlements (BIS) said rock-bottom official interest rates, slashed to revive sluggish economies, have led to a surge in lending and real estate prices in some countries.
As memories of the financial crisis fade and market confidence soars, investors desperate for any return on ultra-cheap money could be creating yet another bubble. Central banks in the euro zone, Japan, Britain and the United States also risk keeping the taps of cheap money open for too long.
"Several early warning indicators signal that vulnerabilities have been building up in the financial systems of several countries," the BIS said in its annual report released yesterday.
While no early warning indicator is completely reliable, dismissing such readings as inappropriate would be too easy, it said.
The warning comes after Bank of England governor Mark Carney rowed back from earlier indications that he would raise interest rates next year.
US Federal Reserve chair Janet Yellen said this month the Fed doesn't intend "to signal any imminent change" in policy and that the balance sheet will remain large "for some time".
The BIS said that in many emerging market economies and Switzerland, the credit-to-gross domestic product (GDP) gap, measuring the current ratio against its long-term trend, is "well above the threshold that indicates trouble".
The gap between real residential property prices and their long-term trend also suggests risks are accumulating in the housing sector, it added.
Rising rates would push the debt service ratios - the share of income used to service debt - of several countries into critical territory, the BIS said, adding that borrowers in China are now seen as the most vulnerable.
BIS chief economist Shin Hyun Song told Reuters that pension funds and other long-term investors are also taking ever bigger risks and could be laying the ground for turmoil when money gets more expensive.
Companies are turning increasingly to financial markets for funding, with gross issuance in the high-yield bond market alone soaring to US$90 billion (S$112.5 billion) per quarter last year, from a pre-crisis quarterly average of US$30 billion, the BIS annual report said.
Such offers found eager investors, including asset managers and pension funds, who were willing to take greater risks to meet return targets or pension obligations when interest rates, volatility and funding costs are all unusually low.
"Things look and feel great but we are storing up a possibly more painful and more destructive reversal," Mr Shin said.
"The one thing that is different between now and 2006/2007 is that the protagonists... are no longer... the banks. This risk-taking is happening through other market players. Long-term investors are also joining in."
Mr Shin called on regulators to be alert to the new risks. "As we have strengthened the regulation on banks, the risks have also changed," he said. "We should not be blind to the fact that we have to address these new risks as they arise."
Property markets are also heating up and the Bank of England sought to put the brakes on Britain's surging housing market on Thursday by announcing a cap on home loans and tougher checks on whether borrowers can repay their mortgages.
Swiss banks will also tighten requirements for mortgage loans after repeated warnings from its central bank and the International Monetary Fund that ultra-low interest rates, immigration and the country's safe-haven appeal for financial investors is feeding a property bubble.
Mr Shin, who helped formulate South Korea's financial stability policy in 2010, cited places like South Korea, Hong Kong and Singapore for successfully using tools, such as limits on loan-to-value or debt-service-to-income ratios, to temper inflated asset prices.
"There is some reluctance in advanced economies to use these macro-prudential tools and that's because these tools are relatively untested in many cases there. There is some catching up to do, in terms of the familiarity," he said.
Interest rates alone could be a very blunt tool to deal with soaring property prices, because they affect the economy as a whole, and combining rate policy with macro-prudential tools would make both more effective, he said.
REUTERS, BLOOMBERG
'Worrying signs' of bubble in real estate, credit boom
BIS report signals growing risks in many countries
Published on Jun 30, 2014 1:25 AM
ZURICH - Regulators should not dismiss "worrying" early signs of unsustainable property price and credit growth, which could leave borrowers vulnerable to interest rate rises or sharp downturns, the body bringing together the world's central banks has warned.
The Bank for International Settlements (BIS) said rock-bottom official interest rates, slashed to revive sluggish economies, have led to a surge in lending and real estate prices in some countries.
As memories of the financial crisis fade and market confidence soars, investors desperate for any return on ultra-cheap money could be creating yet another bubble. Central banks in the euro zone, Japan, Britain and the United States also risk keeping the taps of cheap money open for too long.
"Several early warning indicators signal that vulnerabilities have been building up in the financial systems of several countries," the BIS said in its annual report released yesterday.
While no early warning indicator is completely reliable, dismissing such readings as inappropriate would be too easy, it said.
The warning comes after Bank of England governor Mark Carney rowed back from earlier indications that he would raise interest rates next year.
US Federal Reserve chair Janet Yellen said this month the Fed doesn't intend "to signal any imminent change" in policy and that the balance sheet will remain large "for some time".
The BIS said that in many emerging market economies and Switzerland, the credit-to-gross domestic product (GDP) gap, measuring the current ratio against its long-term trend, is "well above the threshold that indicates trouble".
The gap between real residential property prices and their long-term trend also suggests risks are accumulating in the housing sector, it added.
Rising rates would push the debt service ratios - the share of income used to service debt - of several countries into critical territory, the BIS said, adding that borrowers in China are now seen as the most vulnerable.
BIS chief economist Shin Hyun Song told Reuters that pension funds and other long-term investors are also taking ever bigger risks and could be laying the ground for turmoil when money gets more expensive.
Companies are turning increasingly to financial markets for funding, with gross issuance in the high-yield bond market alone soaring to US$90 billion (S$112.5 billion) per quarter last year, from a pre-crisis quarterly average of US$30 billion, the BIS annual report said.
Such offers found eager investors, including asset managers and pension funds, who were willing to take greater risks to meet return targets or pension obligations when interest rates, volatility and funding costs are all unusually low.
"Things look and feel great but we are storing up a possibly more painful and more destructive reversal," Mr Shin said.
"The one thing that is different between now and 2006/2007 is that the protagonists... are no longer... the banks. This risk-taking is happening through other market players. Long-term investors are also joining in."
Mr Shin called on regulators to be alert to the new risks. "As we have strengthened the regulation on banks, the risks have also changed," he said. "We should not be blind to the fact that we have to address these new risks as they arise."
Property markets are also heating up and the Bank of England sought to put the brakes on Britain's surging housing market on Thursday by announcing a cap on home loans and tougher checks on whether borrowers can repay their mortgages.
Swiss banks will also tighten requirements for mortgage loans after repeated warnings from its central bank and the International Monetary Fund that ultra-low interest rates, immigration and the country's safe-haven appeal for financial investors is feeding a property bubble.
Mr Shin, who helped formulate South Korea's financial stability policy in 2010, cited places like South Korea, Hong Kong and Singapore for successfully using tools, such as limits on loan-to-value or debt-service-to-income ratios, to temper inflated asset prices.
"There is some reluctance in advanced economies to use these macro-prudential tools and that's because these tools are relatively untested in many cases there. There is some catching up to do, in terms of the familiarity," he said.
Interest rates alone could be a very blunt tool to deal with soaring property prices, because they affect the economy as a whole, and combining rate policy with macro-prudential tools would make both more effective, he said.
REUTERS, BLOOMBERG