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Singapore may need to implement more measures to rein in its property market should low interest rates and an economic recovery renew speculative purchases, the central bank said.
Demand for private homes has experienced “strong growth” and unchecked price gains may expose the property market to risks in the global economy, the Monetary Authority of Singapore said in its Financial Stability Review today. There should be “close monitoring” of home prices and transactions, it said.
Asian policy makers from South Korea to Singapore are confronted with rising real-estate values, which threaten to mimic the U.S. mortgage bubble that roiled the global economy. Singapore has barred interest-only loans for some housing projects and stopped allowing developers to absorb interest payments for apartments that are still being built.
“Despite the lingering uncertainties in the domestic and global economy, domestic property market activity has taken on its own dynamic,” the central bank said. “The risk of a renewed escalation of speculative momentum cannot be discounted. The nature and timing of further measures, if deemed necessary, would have to be balanced against the still uncertain path of economic recovery.”
The government is releasing more land for sale in the first half of next year as part of measures to prevent excessive price swings in the property market. Home prices rose 15.8 percent in the third quarter, the most in 28 years, after dropping 25 percent in the previous four quarters.
Low borrowing costs and the island’s recovery from its worst recession in more than four decades aided the rebound in home prices, the central bank said.
The Southeast Asian nation’s economy is forecast by the government to contract as much as 2.5 percent this year. Gross domestic product may expand 3 percent next year, the Straits Times reported today, citing Minister Mentor Lee Kwan Yew.
“Should growth turn out weaker than expected, property buyers and speculators could face capital losses as the market corrects,” the central bank said. “Conversely, if the recovery stays on course, interest rates will eventually rise and drive up financing costs with severe implications for those who have overextended themselves.”
The island’s economy is in a “recovery phase” after its recession and has yet to fully bounce back to pre-crisis levels, the central bank said last month, adding that growth will shift to a more “sustainable trajectory” in 2010.
“Should economic recovery stall, corporate earnings may come under renewed strain and corporate refinancing may become more difficult,” the monetary authority said today. “Unemployment may also rise if the economy slows again. The knock-on effects on consumer and corporate repayment capability could impair banks’ asset quality, resulting in higher non- performing loans and provisioning charges. Loan growth could moderate again, holding back the recovery.”
Singapore may also face some volatility in its stock market, which has surged along with others in the region amid “renewed portfolio inflows from foreign institutional and retail investors on hopes of an early economic recovery,” the monetary authority said.
Global capital flows are likely to recover from this year’s lows as the world economy emerges from the deepest recession since the 1930s, the World Bank said last week. The global equity rally has added about $22 trillion to the value of stocks since this year’s low on March 9.
“A number of commentators and investment advisers have commented that the domestic equity market might have risen too quickly since there has not been a broad-based improvement in company earnings,” Singapore’s central bank said. “A reevaluation of growth prospects or decline in risk appetite could trigger some market volatility.”
The country’s lenders and insurers remained “resilient” during the global credit crisis which toppled banks in the U.S. and Europe, the monetary authority said today. While domestic financial conditions are expected to improve as the economy recovers, the island is still vulnerable to fluctuations in global financial markets, it said.
“Further deterioration in asset quality and some earnings pressure going forward cannot be discounted if the global economic recovery stalls and significant financial dislocations resurface,” it said. “Overall, these challenges are not expected to be severe or to significantly undermine the soundness of Singapore’s financial system.”
Singapore cental bank wary of property mkt speculation
Saeed Azhar & Nopporn Wong-Anan
Singapore’s central bank warned that more measures may be needed to curb the risk of renewed speculation in the country’s property market, buoyant by low borrowing costs.
The comments underscored the growing concern among policymakers in Asia, who are worried that the froth in residential markets in financial centres such as Hong Kong, Singapore and Seoul could turn into a bubble.
“As Singapore emerges from recession and with the market expecting low interest rates to persist for some time, the risk of a renewed escalation of speculative momentum cannot be discounted,” the Monetary Authority of Singapore (MAS) said in an annual Financial Stability Review. “More measures might then be necessary.
The Singapore government in September acted to cool the property market by releasing more land and making it harder for home buyers to defer payments.
Last month Hong Kong’s central bank said it would cap the mortgage limit for luxury property at 60 percent, down from 70 percent currently, and limit loan values.
South Korea’s central bank has warned it would have to raise interest rates to curb a boom in property prices.
The Singapore central bank said property market activity has taken its own dynamics despite the lingering uncertainties in the domestic and global economy.
Singapore’s monetary authority also warned that the global financial market rally has outpaced economic fundamentals and any perception that the economic recovery is stalling could trigger a repricing of financial assets.
It said the rally in Asian asset prices since the first quarter of 2009 has been supported by abundant global liquidity, but they may be sensitive to removal of monetary accommodation.
“Such market volatility could prompt capital outflows from Asia and, in turn, exchange rate volatility,” the MAS said.
Asian stocks, as measured by the MSCI Asia ex-Japan inde, have surged 60 percent this year, outpeforming a 27 percent jump in MSCI’s world equity index.
The MAS said some Asian economies may need to tighten monetary policies ahead of the world’s largest economies, namely the United States, but cautioned against a significant tightening earlier than the G3 countries.
“If monetary policy needs to be tightened significantly earlier than in the G3, carry trades, capital inflows and exchange rate appreciate pressure could result, potentially entailing a risk of asset price bubbles,” the MAS said.
In October Singapore’s central bank kept its loose monetary policy unchanged because it was unconvinced an economic rebound can be sustained. The MAS said Singapore’s financial system has weathered the financial crisis well and domestic financial conditions should continue to improve as the economy recovers.
Singapore banks led by by Singapore’s biggest bank, DBS, beat market expectations with a strong set of third-quarter earnings and are better positioned than global peers for post-crisis.
But the MAS cautioned that the situation in the Singapore financial system is not without downside risks, largely due to concerns over the sustainability of the global recovery.