Singapore’s Real Estate Reveals Structural Fault
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Residential property prices in Singapore fell in the 1st quarter of 2012, with the high-end market losing 0.9%. Supply is high due to the miasma in Europe and the fact that property rose in value since 2006 by more than 50%, a clear case of over-investment due to loose monetary policy (i.e. lowering interest rates to the zero-bound to manage the Singapore Dollar’s appreciation versus the U.S. Dollar and the euro). In truth it hasn’t worked. The Singapore Dollar has been in a structural bull run versus both of those currencies for nearly 10 years, while it’s done a random walk versus the Japanese Yen, sauntering vaguely downward as the Bank of Japan has not kept pace with the money printing that’s been going on in the West.
So, loose monetary policy has created a bit of a bubble in Singaporean real estate. S-REIT’s of all stripes have done very well, throwing off double-digit yields for the past few years as capital flows towards the island city-state. Think about this: You have an appreciating currency, low borrowing costs and geographical constraints. Of course there’s going to be a huge run in prices. Eventually demand was bound to slow down, and it has. The government understands this and instead of raising rates, which is going to have to happen if they want to halt the rise in CPI inflation, instituted a stamp tax equal to 10% of the purchase price on foreign property buyers. There’s a 3% tax on various 2nd and 3rd home purchases as well for residents and citizens.
The stamp tax is having its intended effect, but it will only slow the rate of development rather than break prices. Singapore is seeing massive flows into its economy as capital flies out of Europe and the U.S., chased away by profligate central bank policy and growing capital controls on domestics. Class A office space is running at 95% capacity, and GDP is still growing at a respectable 4.5% so far in 2012.
While CPI inflation was down in May to 5.0%, the rise in accommodation costs remained extremely high at 9.0%, but dropped from 12.7% in April.
At some point, the Monetary Authority of Singapore (MAS) is going to have to make a decision about maintaining its low-interest rate stance. Raising fees on real estate and car sales is a symptom of a deeper problem, a problem that stems from ultra-low lending rates. Compounding the problem is that the government is running such a budget surplus that they are giving out Goods and Services Tax (GST) refunds which will only make the market more awash with money that can be levered up. In other words the money is still flowing; the stamp tax is just moving it around.
When the Federal Reserve embarks on the next round of quantitative easing and pushes real interest rates in the U.S. sharply more negative this will put even more pressure on the MAS to alter its policy or risk a real explosion of the real estate market. I’d watch the SGD/JPY cross when that happens to see if there is a structural weakening of the Singapore Dollar regionally.
For now it is all green lights in Singapore’s financial system. Both funds which cover the country are heavily exposed to the major banks: The Singapore Fund (NYSE: SGF) and the iShares MCSI Singapore Index ETF (NYSEMKT: EWS).
China and Singapore just announced that a pair of Chinese banks operating in Singapore are to be considered Qualified Full Banks and will have full access to retail banking in Singapore, as well as one of them providing full clearing for transactions in Yuan. Currently, there are three Chinese banks operating in Singapore, including Bank of China, Industrial and Commercial Bank of China, and China Construction Bank. Similarly the three major Singaporean banks, DBS, UOB and OCBC have been cleared to open branches in China.
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