Low rates, excess cash may impede property cooling

November 26, 2010
Singapore Democrats

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Bloomberg

Singapore’s central bank said low borrowing costs and excess liquidity globally may push the island’s property prices higher again, setting back government efforts to cool the market.

There is a risk that financial institutions may ease lending standards and extend more loans to make up for narrowing interest margins, the Monetary Authority of Singapore said in its Financial Stability Review today. Buyers may also take on “excessive leverage” amid expectations of a sustained period of low rates, the central bank said.

The government in August increased down payments for second mortgages and imposed a stamp duty on property held for less than three years to curb speculation. After leading 36 markets around the world in property-value changes in the second quarter in a Global Property Guide survey, government statistics showed price gains slowed in the three months to the end of September.

“There is a possibility that transaction activity and prices could pick up again given the current global conditions of flush liquidity and low interest rates,” the central bank said. “The government will continue to be vigilant in monitoring developments in the property market, and if necessary, adopt additional measures to promote a sustainable property market.”

Private residential prices rose 2.9 percent in the third quarter from the previous three months, when they climbed 5.3 percent, according to Urban Redevelopment Authority. Singapore’s government forecasts economic growth of 15 percent this year and expansion of 4 percent to 6 percent in 2011.

‘Escalating Prices’

“As the property market is sentiment-sensitive, a pick-up in activity could lead to rapidly escalating prices,” the central bank said. “If economic recovery disappoints on the downside amidst continued uncertainties in the global economy and market confidence is dented, prices could fall. On the other hand, if the economic recovery continues apace, there could be widespread implications on buyers who overextended themselves when interest rates eventually rise.”

Asian markets including China, Hong Kong and Taiwan introduced measures including higher down payments on loans this year to cool their property markets amid concerns that asset bubbles are forming as home prices surge.

Hong Kong intensified its yearlong battle to curb prices with additional taxes last week, while Ba Shusong, a top Chinese cabinet researcher, said in a commentary in China Business News today that tougher property measures are needed in the country.

‘Harsher’ Measures

“We need to introduce harsher tightening policies to curb property speculation,” said Ba, who’s also deputy director- general of China’s State Council’s Development Research Center. “Inflation is expected to rise, driven by excess liquidity and low interest rates.”

China, which last month raised interest rates for the first time in three years, this year suspended mortgages for third- home purchases and pledged to speed up trials of property taxes to restrain foreign capital and cool property prices. While home prices posted the smallest gain in 10 months in October, the nation’s biggest developers reported higher home sales and inflation accelerated to the fastest pace in two years.

Asian economies are battling capital inflows that threaten to create asset bubbles as investors seek higher returns in a region where growth is outpacing the rest of the world. Asian currencies have surged this year and some stock markets have reached record levels in recent weeks as the Federal Reserve embarked on another round of quantitative easing.

Quantitative Easing

The U.S. Federal Reserve said this month it will purchase $600 billion of Treasuries to spur the world’s largest economy, a move known as quantitative easing that policy makers from Asia to South America said could depress the dollar and spark capital flight to emerging markets.

About $600 billion in foreign capital flowed into Asia in the year ended in the second quarter of 2010, the Singapore central bank said. While the inflows were “substantial,” they are still “significantly smaller” than those seen in 2007, it said, adding that Asian banking systems appear to be resilient.

“The search for yield among investors with short investment horizons or those that are excessively optimistic could push prices away from fundamentals for a range of asset classes,” according to the review. “The risk is especially high where markets may not be sufficiently deep or liquid. Should capital flows reverse, disorderly corrections could result.”

 

Thailand

To manage inflows, Thailand scrapped an exemption last month that allowed foreigners to avoid a 15 percent tax on income from its bonds. South Korea’s government said last week it plans to reinstate income and capital-gains taxes on overseas investors’ bond holdings, while Taiwan said Nov. 9 that global funds will be allowed to invest no more than 30 percent of their portfolios in government bonds and money-market products.

While Asian policy makers have adopted various measures to address risks related to capital flows, asset prices and bank credit quality, “there is scope for structural reform to further address these risks,” the central bank said. “A key priority would be broadening and deepening Asian financial markets to enable more efficient intermediation of capital inflows.”

http://www.bloomberg.com/news/2010-11-25/singapore-says-low-borrowing-costs-excess-cash-may-spur-property-market.html