The local unemployment rate might be ticking higher as the economy slows, and private home prices might continue to drop. But with a potential deflation in China’s property market bubble that could lead to money flowing out of China, along with continued low mortgage costs here, the government should be wary of lifting cooling measures in Singapore’s property market.

Having a high proportion of satisfied home owners in Singapore is critical to social and political stability. Rising house prices in 2010 and 2011 contributed to a wave of dissatisfaction that led to the People’s Action Party’s lowest winning margin since independence in the 2011 General Election. Since then, and especially from mid-2013 when a framework was introduced limiting the debt borrowers could take on, moderating home prices along with an increased number of flats for first-timers have improved sentiment. This probably contributed to a significant improvement in the PAP’s performance in the 2015 General Election, especially among younger voters.

The conclusion is straightforward. Prices cannot be allowed to spiral out of reach for the ordinary man on the street, who aspires to own not just a more affordable public flat but also private property, which is twice the price.

In the years following the global financial crisis, the rise in property prices – up 60 per cent from 2009 to 2013 – have outstripped growth in nominal incomes, which are up just 30 per cent. Private property prices are down around 10 per cent since 2013, and incomes are up less than that. Arguably, there is at least another 5-10 per cent to go in property price declines before the price to wage ratio is back at the 2009 level.

However, the government also has to balance the aspirational needs of the younger generation with the retirement concerns of older voters, who have benefited from property price rises through the decades. Older, wealthier voters want a second or even third property to rent out. They are disadvantaged by additional stamp duties on properties beyond their first.

Meanwhile, property developers suffering from the current excess capacity in the market have also been pushing the government to get ahead of the curve in policymaking. They note, quite correctly, that governments cannot time the market and by the time cooling measures are relaxed, it might be too late to stem a serious economy-damaging downturn.

While property-owning interests might have a case, their arguments are trumped by external conditions, given Singapore’s small and open economy. Interest rates might be due to rise in December, but they still remain at very low levels. Indeed, a recent drop in the three-month Singapore interbank offered rate, or Sibor, is causing banks to compete to offer cheap loan packages.

Meanwhile, house prices are continuing to rise to incredible levels in first-tier Chinese cities – as well as in Hong Kong, with year-on-year increases of some 40 per cent. Local governments there are now introducing cooling measures. If prices start dipping, those who want to cash in may very well look to redeploy their wealth elsewhere. Singapore, with its stable government and currency, and financial hub status, has always been attractive for Chinese investors. Chances are that speculative flows into the Singapore property market will come again. There is no reason to encourage them now.

Adapted from: The Business Times, 12 October 2016

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