Low interest rates for decades?

Surprised by the strength in September new private home sales, some market watchers were hard pressed to explain the size of the rebound, especially after having blamed the Total Debt Servicing Ratio (TDSR) framework introduced in June for the housing sector’s woes over the past few months.

They did find one plausible explanation for the 65-per-cent jump from August to 1,246 units sold last month, attributing this to the attractive pricing and aggressive marketing adopted by developers as the market adjusted to the TDSR.

Yes, the market is certainly showing improvement, but this is largely from events in America, where the Federal Reserve in mid-September backed off from its widely-announced intention to taper its US$85 billion (S$105.5 billion) monthly bond purchases.

Not much discussed in the local news was Pimco’s spot-on call that the Fed would not be moving too quickly on revising its low interest rate policy. Pimco is one of the world’s largest bond fund managers, with US$2 trillion under management and its views on Fed actions and global credit influence other investors because of the firm’s size in the marketplace. In his letter, entitled Survival of the Fittest?, Pimco founder Bill Gross said the global economy might be facing low policy rates for decades.

While I did not expect the Fed to start its tapering, I find his view that low interest rates would prevail for decades globally hard to swallow. Yes, it can happen to a country as the case of Japan has proven. But globally? And for decades?

If Pimco’s views are correct, how will the world — and we in Singapore — adjust to this? The widely-held view in Singapore by experts, official as well as those in the private sector, has always been that the existing low-rate environment is not sustainable.

In Singapore, low rates are into their fifth year now. If they continue to be so, and for decades, will investors keep on piling into the property market? Will there be more empty apartments, notwithstanding higher holding costs due to new tax rules on vacant properties?

At present, investors with a large-enough property portfolio have shown they are able to survive just by collecting rent on half their properties. Keeping half of them vacant has been no skin off their backs.

ABOUT THE AUTHOR: Colin Tan is the Head of Research and Consultancy at Suntec Real Estate.