Seven cooling measures have come and gone in the Singapore property market, each one more stringent and restrictive than the one before. For a while, the Singapore property market laid low while absorbing the impact of these policies. But propwise had this to say in a recent article:

“But the recent flash estimate of the Singapore Residential Price Index (SRPI) published by the Institute of Real Estate Studies at the National University of Singapore indicated that home resale prices accelerated to a 1.9% increase in April, compared to a 1.1% increase in March.

In particular, prices of private homes in the Outside Central Region rose the fastest by 2.4%, while homes in the Central Region rose by 1.3%. Even prices of shoebox units (defined by the SRPI as units of size 506 square feet and below), also increased by 1.8% versus the 0.8% increase in the previous month.”

In other words, indications are that prices have resumed their upwards climb again. This does not bode well for the effectiveness of the cooling measures as a whole.

Obviously, the measures are not hitting the right spots to achieve their stated intent. Perhaps targeting housing prices directly may not be the solution. If the available money supply, in the form of liquid assets or easy borrowing, is too high, then increasing the cost of buying will do little to stem the upward rise in prices.

This large pool of easy money will not be satiated by increasing the housing supply either. While such a move may cause prices to decrease, it also means that more housing loans will be taken out, thus increasing the exposure of banks in the housing market. The proportion of loan risks that banks take on will skew even more to property.

Now, in relation to the total housing market, new housing units coming into market are a small number, so increased exposure should be small too, right? But we think this is not quite accurate. We believe that the whole market includes many fully and nearly paid-up homes. It also consists of many loans with a lower loan amount due to the lower prices that existed prior to 2008. These housing loans are a lower risk and exposure. The new housing units will be starting at the full loan tenure, and likely at a much higher loan quantum. That equates to a much greater amount of risk and exposure. The new housing will take up a disproportionate percentage of the exposed loans.

In other words, while the number of new residences may be small relative to the existing market, the amount they represent in loans is a large percentage of the existing loan amounts in property. This could lead to a much greater exposure than anticipated in our banking system, with consequences outlined in our prior article.

Increasing interest rates could be one way to stem this flow of “easy money” into the hands of potential buyers. Buyers would not be so inclined to take high-capital, long-term loans if interest rates were not at such historical lows. Housing loans would shrink, thereby decreasing the absolute amount that can be spent on a home. This would also reduce the amount of leverage and exposure of borrowers and their banks.

As expected, a general increase in interest rates would most likely have adverse effects across the board.

One such area we would specifically like to address is businesses in Singapore. Other measures would be needed to support innovation and entrepreneurship in Singapore. For example, Spring loans are micro-loans that are currently backed by the government. In effect, the government acts as a guarantor for these business loans, decreasing the premium paid for risk. This in turn can reduce the interest rate paid for such loans, since the risk factor is much reduced.

Similar schemes could be introduced for business and industry-specific loans, such as trade finance, warehouse financing and machinery, equipment financing and letters of credit. We are sure that other more creative solutions and policies could be developed by the government and relevant industries.

We’d love to hear from our readers if they have any comments, questions or opinions. Please post below, or follow/like us on our FacebookTwitter, and Google+ pages.


  One Response to “Cooling Measures Are No Match for Money Supply”


    The govt should stop sales of homes to foreigners.
    It should also pray hard for a recession

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