LOW or negative real interest rates are often cited as one factor supporting housing prices. But Citi believes that in today's market, negative real interest rates will at best be a 'cushion' in the near term.
In a report on the Singapore market, Citi analyst and vice-president (Asia Pacific Economics & Market Analysis) Kit Wei Zheng said: 'Negative real interest rates, in and of themselves, are unlikely to be sufficient to drive housing prices, especially if income growth and sentiment are weak.'
In his analysis of property prices and real interest rates, Mr Kit noted that while a correlation was 'maintained' during the Asian financial crisis, this correlation broke down during the 2001 recession.
'Between 2001 and mid-2004, property prices continued to fall even as real interest rates fell and eventually turned negative,' he said. He also pointed out that between mid-2004 and 2007, property prices soared despite rising real interest rates.
'Finally, property price inflation has moderated in the past two quarters, despite increasingly negative real interest rates,' he added. Mr Kit believes income growth probably has a 'stronger explanatory power in explaining housing price trends'.
He noted that a strong labour market not only improves housing affordability but lifts rental demand from foreigners, thereby increasing rental yields and the attractiveness of residential property as an investment.
Citing the Monetary Authority of Singapore's Macro-economic Review, he also noted that on average, the boost to asset prices from a one percentage point fall in foreign interest rates - which would affect domestic interest rates - is less than half of the income effect from a positive one per cent foreign demand shock.
The bad news, however, is that Mr Kit believes employment growth here may have peaked. 'Total employment growth will likely fall short of the record 238,000 jobs created last year, more likely in the range of 120,000-150,000, with attendant slowdown in payroll growth,' he said.
Nevertheless, Citi is 'not inclined to be overly bearish and do not anticipate a collapse' in the property market.
Negative or low interest rates may eventually prove 'supportive of housing demand' if they coincide with a rebound in incomes and sentiment that many expect with the launch of the integrated resorts.
Mr Kit also believes that official figures for new housing supply could be over-estimated. He said that in the context of 'heightened construction bottlenecks and spiralling material costs, actual supply in 2009 and 2010 will more likely be in the range of 18,000-19,000 units', less than two-thirds of the 30,296 projected.
Also on the optimistic side, he said a recent MAS survey showing a fall of the value of mortgages in negative equity suggests that households 'remain flush with cash'.
Affordability is also in check. For example, Mr Kit said the median price of a 110 sq m condo is about 23 times the average annual wage per person, which is still below the 25 times in 2000 and more than 33 times before the 1996 bust.
This article was first published in The Business Times on May 6, 2008
