Economic Affairs

Stock market blues and property prices

A rocky start to the year on the local stock market and the spectre of rising interest rates could bring the vexed question of Singapore's property cooling measures to a head sooner rather than later.

So far, the Government has signalled it has no plans to tweak the measures, unveiled from 2009 to 2013, when the local property market was red hot.

Private home prices have been in steady decline for nine quarters. They are now 8.4 per cent below recent peak prices in the third quarter of 2013, according to official data released late last month. Resale HDB flat prices have gradually weakened and are consolidating.

The slump on the stock market has been far more volatile and dramatic. After a rough 2015, in just the first three weeks of the year, the Straits Times Index (STI) shed about 12 per cent, though it recovered a little to a 10.5 per cent year-to-date loss as at yesterday's close.

So what has the stock market got to do with housing prices?

Experts have identified a historical correlation between the real estate and stock markets - which suggests that housing prices are set to fall further and faster.

If that plays out, the authorities might reverse cooling measures earlier than otherwise intended but it also means they arguably should look to tweak measures soon while there is still liquidity in the market.



Studies indicate that the real estate and equity markets track each other closely.

Take, for instance, a paper by the late Singapore Management University professor Winston Koh and others, in an examination of the Thai, Indonesian, Singapore, Hong Kong and Malaysian markets when real estate prices boomed and collapsed in the 1990s.The authors found a close correlation between stock market capitalisation and real estate prices during the period.

More recently, a study here by Cushman & Wakefield found the residential property price index (PPI) has tracked the STI from 1988 to date, with the PPI performance lagging by about three months.

The lag may be explained by the fact that the STI reflects, in part, levels of wealth created or destroyed here, said Ms Christine Li, research director at Cushman & Wakefield. "Generally, if people make money from the stock market, they might want to re-invest the capital gains into physical assets which can yield some stable income." But when the stock market performs badly, people are "poorer" with capital stuck in shares, and they have less incentive to look at alternative investments, she said.

Importantly, equity markets also affect sentiment, and the property market is sentiment-driven.

Three major housing market dips in recent memory - the 1997/1998 Asian financial crisis, Sars in 2003, and the 2008/2009 global financial crisis - took place for different reasons. But they had one feature in common: a lack of confidence that prices would hold, said Savills Singapore research head Alan Cheong. Eventually, property prices will go the way of equity markets.

One key difference in this situation is that falling housing prices have been caused by cooling measures intended to stabilise the market. Now that the market is more stable, it is perhaps time to reconsider some of the measures.


The three-month Sibor, a benchmark interest rate widely used to price mortgages, is expected to rise to 2 per cent by the end of this year from about 1.25 now. Experts say that a rethink of refinancing rules under the Total Debt Servicing Ratio (TDSR) may be needed to prevent big trouble for households weighed down by heavy debt.

Many home loan packages were signed three to four years ago at loan to value ratios of 60 to 80 per cent, said Century 21 chief executive Ku Swee Yong.

In many of these packages, the initial "promotion" period may be over, so higher rates would kick in - exacerbated by a rising Sibor. That means some home loans face about 3 to 4 per cent interest rates - well above earlier rates and even some existing rates for new packages.

Also, some who bought properties for investment may now find rental income cannot cover both interest and monthly maintenance costs, as many properties are being rented out at rental levels that represent a 2 to 3 per cent return on the property's full price, said Mr Ku.

These investors - who pushed their budgets in the first place to invest - could face trouble.


While the measures may have been necessary, they have also distorted the market by curtailing transactions. Those who can afford a second or third property are staying their hands, unwilling to pay the Additional Buyer's Stamp Duty.

On the other hand, the segment of buyers who had been priced out of the private property market during the boom years remains sidelined as prices have not have fallen sufficiently to make it affordable.

A third group of buyers - those who trade their existing homes for another - have also found their wings clipped by tighter loan rules and TDSR requirement.

Home transaction volumes have come off by about 63 per cent compared to 2012, noted Mr Cheong of Savills. Not only are developers affected, but the entire real estate value chain and ancillary services have also been hit. This has had an adverse impact on the earnings of housing agents, mortgage bankers, lawyers, renovation contractors, architects and interior designers.


Data tends to lag behind events on the ground, which means the authorities must keep a close watch and not rely too much on statistics.

If a crisis arises from severe stock market corrections, some sellers may have to sell at steep discounts, said Mr Ong Teck Hui, JLL national research director. "At the early stage of the crisis, this may not be so obvious except to the agents who are involved in the deals," he noted. But as the crisis deepens, more distressed sales may surface. When that happens, buyers will become more cautious, making deals difficult to close, which will shrink transaction volumes even further.

To be sure, economic conditions today are nowhere near crisis proportions. While economic growth is slower and the macro landscape is challenging, Singapore is not in a recession, said CIMB Private Banking economist Song Seng Wun. The property market remains fairly orderly, with developers trimming but not slashing prices, he added.

"It is not yet time to unwind the cooling measures in view of the moderate price adjustments so far and risk of a premature market rebound," a Ministry of National Development spokesman told The Straits Times on Monday.

It will continue to monitor the market and adjust the measures as necessary, the spokesman added.

The price decline so far seems in line with government targets for a soft landing, while private home prices may not yet have fallen to affordable levels for a significant number of people.

Experts generally agree that it would take a major blow - perhaps a major corporation in default, or a pillar of the economy shaken to the core - for prices to go into free fall.

But timing is everything, and taking action only when the numbers bear bad news could be too late.

A version of this article appeared in the print edition of The Straits Times on February 03, 2016, with the headline 'Stock market blues and property prices'. Print Edition | Subscribe