Overview of the Asian covered bond market

Since 2016, the Asian euro benchmark covered bond market has experienced substantial growth, with the outstanding volume now reaching €24bn. Despite this expansion, it remains a niche market, accounting for approximately 2% of the total euro benchmark covered bond market. Currently, there are eleven Asian covered bond issuers, all backed by residential mortgage loans. South Korean issuers lead the market, representing 43% of the outstanding volume, followed by Singapore at 32% and Japan at 25%. In Singapore , growth is moderating amid global trade tensions, despite recent electoral stability. Q1 2025 saw GDP slow to 3.8% YoY from 5% in Q4 2024. While front-loaded exports offered a temporary lift, a Q2 slowdown is anticipated as tariff impacts and weaker global demand, particularly from China and the US, take hold. Inflation is easing by 0.9% YoY in March, and both monetary and fiscal policies are expected to provide support. The residential property market is stabilizing, with price growth slowing. Demand persists, especially for HDB flats, supported by low unemployment. However, increased housing supply and slower economic growth will temper price appreciation, though declining interest rates offer some support. Rental prices are expected to be flat. In South Korea , the economy is slowing, with Q1 2025 GDP contracting -0.2% QoQ due to worsening exports, investment, and political instability. US tariffs are impacting trade (April PMI at 47.5), though a USD9.7 bn stimulus and potential BOK rate cuts aim to provide support. Inflation remains manageable at 2.1% YoY. The nation grapples with high corporate debt (112% of GDP) and upcoming snap elections. The housing market is stabilizing after a -7.8% price drop from its 2022 peak, aided by lower rates and eased restrictions. While household debt is as high as 91% of GDP, a lower proportion of floating-rate loans offers some buffer. A significant housing recovery is unlikely due to weak economic conditions. In Japan , as global economic uncertainty deepens, Japan’s softening economic cycle is expected to amplify the structural weakness in the housing market. On the back of declining population, the vacancy rate has been steadily rising, which limited the recovery in real estate prices at a national level. On the other hand, land prices in major cities have outperformed in especially in Tokyo, which benefited from larger migration from regional areas. While the housing market conditions have diverged, elevated interest rates compared to previous decades are anticipated to erode households’ purchasing power, when wage growth is expected to moderate. These developments are anticipated to soften housing demand.