Hot-money flows into Asia have hogged the headlines for much of the past month as the investment community acted in anticipation of the second round of quantitative easing that the United States Federal Reserve is expected to unleash.
Rapid and large fund flows into a region tend to inflate prices in all asset classes, creating wealth in the destination countries. Typically, such new wealth created tends to be attracted to property.
We saw this happen after the Fed’s first round of quantitative easing that started in October 2008. In Singapore, the benchmark Straits Times Index rose 91 per cent by the end of last year, after reaching a trough of 1,513 points on March 1 last year. Private home prices, as measured by the Urban Redevelopment Authority’s Private Residential Property Index, increased by 24 per cent between 2Q2009 and 4Q2009.
These increases came about even when the economic picture was nowhere as rosy as it is now: Singapore’s GDP growth in 2Q2009 was at 1.8 per cent and the unemployment rate stood at 3.3 per cent. The latest data showed 3Q2010 GDP growth at 10.6 per cent, with full-year growth expected to hit 15 per cent, while the 3Q2010 unemployment rate stood at 2.1 per cent.
Drawing from this, it may be argued that if the fund flows into Asia do materialise and generate another round of wealth creation, property prices here may not come down next year, despite the Government’s cooling measures.
To slow the increases in property prices, the Government has implemented three rounds of measures to moderate investment demand since last year, the latest on Aug 30. And only last week, supply-side measures were introduced when the Government announced a record high quantum of land to be released for sale in the first half of next year.
Although there were periods of immediate slowdown in market activity after these measures, the property market has proven to be very resilient and prices have continued to climb. Those who have been waiting for “distressed sales” can attest to the market’s resilience. Why is this so?
Singapore is reaping the benefits of years of effort to reshape its economy that have contributed to a very strong wealth creation cycle.
Evidence of this can be found from the Inland Revenue Authority of Singapore’s annual reports. On a year-on-year basis, the number of residents with assessed income of $100,001 and above has been increasing. There were 132,399, 153,779, 187,856 and 215,467 residents with taxable income of $100,001 and more in the Years of Assessment 2006, 2007, 2008 and 2009, respectively. Note also that the number did not fall in the recessionary period from 2008 to last year.
Also, the Monetary Authority of Singapore’s Financial Stability Report released this month showed that the net wealth of Singapore households has increased by 29 per cent from the trough in 1Q2009, while household net debt-to-asset ratio remains at a low of 15 per cent, compared to a historical average of 18 per cent. According to the MAS report, the proportion of housing loans in negative equity has fallen from a peak of 2.9 per cent in 3Q2009 to less than 1 per cent since 4Q2009. These factors have contributed to the ability of Singaporeans to continue to buy properties or upgrade.
Fundamentally, investing in Singapore’s private residential property market has probably never been as attractive due to the positive carry. This has been brought about by the low interest rate environment and a resilient rental market, with overall occupancy at 94 per cent as at 3Q2010, according to URA data.
Looking ahead, we are entering into a positive wealth creation cycle: Wage growth and bonuses are expected to be good, the economy is expected to fare well next year and Asian stock markets are expected to rise, according to various reports by equity strategists.
Thus, there is good reason to expect property prices to continue their moderate climb in the coming months. Demand could be further supported by foreign funds, with Singapore’s property market remaining attractive due to a relatively lower level of entry barriers compared to Hong Kong and China and underpinned by sound economic fundamentals.
This, ironically, could trigger more measures by the Government to cool the market. These could include further reduction of the loan-to-value ratios for home purchases, limiting the use of CPF money for investment properties or even introducing a capital gains tax to “catch up” with Hong Kong, among others. The impetus for more measures may come from the need to ensure that Singapore does not get an over-allocation of “hot money”.
But I am beginning to doubt whether Government measures alone would be enough to curb sentiment if the wealth creation cycle continues and credit remains cheap, which would mean that those expecting a prolonged price fall will be disappointed.
By Tan Kok Keong, head of research and consultancy at Orange Tee
