Somehow, deep down, we – especially those of us who have been keeping a close watch on the private housing market – know that an external crisis or crises, like the ones ravaging global stock markets now, were going to happen way ahead of the “perfect storm” some had forecast for 2013/2014 for the property sector here.
I am talking about the repercussions arising from the strong possibility of the United States economy slipping back into recession and from the euro zone’s inability to contain its sovereign debt problems.
At the moment, it is all conjecture. The market is taking in all the negative news and ignoring the positive. The slight drop in US unemployment figures had little impact while the US Federal Reserve’s unprecedented pledge to keep interest rates low until at least mid-2013 provided only temporary relief.
The problem is that if the carnage in the stock markets does not stop soon, the bad news will be self-fulfilling and become a reality even if those troubled economies were never heading down the recession path in the first place. The strong overreaction of investors may even worsen a contraction of the US and euro zone economies.
There is now a rush of funds to safe havens – to gold, the Japanese yen, the growth economies of Asia and the few countries that still have a perfect triple-A rating from all the major rating agencies.
At home, the swap offer rate (SOR), a benchmark interest rate that mortgage rates are commonly pegged to, fell below zero for the first time, falling to minus 0.0119 per cent. A negative rate sounds absurd because it implies that banks now charge a “fee” – as opposed to paying interest – for accepting deposits.
Bankers say this is happening because investors are switching out of the US dollar and there are increased cash flows into Singapore. With a weakening greenback, the SOR will continue to fall. Some analysts do not think the depressed SOR will persist, predicting some form of intervention by the Monetary Authority of Singapore, but what is certain is that interest rates will remain low.
The uncertain global outlook translates into a challenging environment for Singapore’s open economy. Some economists are already predicting a slowing market for jobs and lower asset prices for Singapore as early as the end of this year.
Meanwhile, as far as I can see, the Chinese economy is still growing and facing strong inflationary pressures. The authorities there are also fighting against time to engineer a switch from a heavy dependence on export demand to a domestic-driven one.
What does all this mean for the private housing market in Singapore? If the price levels of the local stock market stay down, will the physical market follow? After all, there is some correlation – a lag effect of several months – between the property cycle and the business cycle. This is the traditional outcome, but the markets today are operating in an abnormal environment fashioned by policy-makers in the major economies, so we cannot just assume this will happen.
Private home purchases are sentiment-driven, especially if they involve investors; so for now at least, there will probably be a sharp slowdown in home sales. Whether sales remain depressed will depend on the employment situation. If most jobs remain intact, the buying may resume, especially when interest rates remain low.
Should the Singapore economy slip into recession and jobs are lost, prices will certainly start to correct, but how much downside will there be?
If interest rates stay low worldwide, or at least in the West and Japan, there will be ample liquidity in the global markets and these monies will be in constant search of safe havens. And if China’s economy remains strong, our falling property prices will appear even more attractive to Chinese investors.
But even if the Chinese economy falters, and if unemployment there rises and social unrest threatens to erupt, is it not more reason for these investors to diversify and move their funds out of the country?
After all, all good things must come to an end. Where do you think they will park their monies? We do not need all of them to come to Singapore. There are so many billionaires there, just a small percentage of them will do.
By Colin Tan – head of research & consultancy at Chesterton Suntec International.