Lessons to be gleaned from Singapore’s property boom

Gillian Tett
Financial Times

If you talk to financiers in Singapore these days, the topic of property prices keeps cropping up but, unlike in America, it is not the threat of further real estate market falls.

Instead, as Wall Street worries about American house prices – exemplified by a downbeat report from Goldman Sachs this week – in Asia there is mounting concern about property booms-cum-bubbles.

Thus far this year in Hong Kong, for example, residential property prices are estimated to have surged by about 25 per cent. In Singapore the increase is calculated at more than 15 per cent. However, on a visit to that city this week, I was repeatedly told by locals that these figures may be understating the trend: in prime residential and business centres, there is reportedly such a bidding frenzy for good assets, that prices are far higher than official data imply.

The trend is striking for at least two reasons. For one thing, it provides another graphic sign of an issue I discussed in last week’s column – namely the degree to which a flood of money in the global financial system is now potentially creating new mini-bubbles in certain asset classes.

To be fair, this is certainly not the first time that Asian property markets have been on a roller-coaster ride. After the Asian crisis a decade ago, prices swung dramatically too. And this year’s price surge has still not reversed the dramatic tumble seen last year. The Asian property index is still “only” trading back where it was in the spring of 2008, below the dizzy peaks of 2007. Nevertheless, the sheer scale and speed of this year’s rebound has taken even locals by surprise. And while part of the boom reflects optimism about Asian growth prospects, another key factor is that investors round the world are now frantically searching for yields, amid the ultra loose western monetary policy (which, by default, translates into loose policy into much of Asia too, due to fixed exchange rates).

To make matters worse, there is a growing trend among Asian investment groups to hedge themselves against the chance of future dollar falls by investing in “hard”, non-dollar assets instead. Just look at this week’s comments from the China Investment Corporation, the huge sovereign wealth fund that is now moving into commodities and real estate. Hence that frenzy for Singaporean prime assets, say, even as property prices continue to tumble in New York.

However, the second reason why the Asian property story is fascinating is that it may herald a potentially striking new twist in the global central bank policy debate. In recent weeks, some Asian central banks have started to tighten policy, by using traditional monetary policy levers. The Australian central bank, for example, recently raised rates, and this week the Indian central bank also tightened policy by forcing its banks to raise reserves (presaging a future rate rise).

However, what has grabbed less global attention is that some Asian authorities are also acting in less orthodox ways, by imposing modest credit constraints and prudential controls. In Hong Kong, for example, the authorities have recently tightened the conditions for down-payments on luxury homes. In Singapore, the government has banned some interest-only loans. Meanwhile in South Korea the government is tightening the screws on mortgages, in relation to loan-to-value conditions.

Thus far these measures are modest and it is far from clear whether they will work. However, they are likely to be closely watched by some western central banks. During most of the past two decades, European and US authorities have shied away from the idea of using prudential measures to control the credit cycle, preferring to rely exclusively on interest rate levers.

However, the recent financial crisis has forced central banks to rethink this exclusive dependence on interest rate levers in terms of combating the slump. Just think of all the innovative measures central banks have adopted, as part of their quantitative easing programmes.

That, in turn, begs another question – namely, whether western central banks may also be tempted to reconsider their exclusive reliance on interest rate levers if, or when, the recovery takes hold.

Thus far, few US or European central banks are rushing to debate that in public; after all, to many western central bankers, the concept of credit controls looks unpleasantly “socialist” (or, at least, something only associated with a place such as China).

However, if asset prices start spiralling out of control in the west and, say, unemployment soars too, the problems of relying on interest rate levels alone may become more apparent. What is being quietly tried in Singapore, in other words, may yet spread into the western markets. Just one more reason – if any was needed – to keep a close eye on Asia.


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