Sharper focus on interest rates needed in property market projections

Another month passes and another property market forecast is made — but nothing really new is said. If you want to be cynical about it, the prediction of the market’s demise in the near future is old hat. Analysts have been queueing up to repeat this mantra with increasing frequency since a couple of years ago, some even as early as when stamp duties were introduced in an attempt to cool the market.

While the analysts have backed their forecasts with arguments and data about the oversupply, the tepid growth, the new productivity-driven economic model and tighter population policy, there is very little discussion on interest rates and how they may trend in the near future.

This topic is usually sidelined, with the reports merely mentioning how interest rates might rise by a stated period as though other factors play a far more important role.

Given how persistently-low interest rates have played havoc with the property markets in almost all the major global cities over the last few years, I would have thought the topic of rates and holding costs deserve more analysis. Seasoned investors would be aware of this, but less savvy ones are getting confused.

The idea of a huge oversupply of property not driving rents and prices significantly lower may seem inconceivable. But it has already happened in some cities in China where they have been described as ghost towns. Singapore may not be big enough to have ghost towns, but we do have ghost neighbourhoods.

The adoption of the productivity-driven economic model has been cited as one major factor that will hold back our growth significantly and which in turn will affect the property market.

Yes, small- and medium-sized enterprises are bearing the brunt of this new model and a pause may be in order, with restructuring proceeding at too fast a pace.

But we must also recognise the political dimensions of this new model: A little sacrifice now will do wonders for us in the future. Labour and rentals are usually the two largest costs for most SMEs. If wages rise rapidly, lower rents can mitigate the cost burden.

It cannot escape our attention that the authorities have also been ramping up supply for industrial and commercial properties. This is where I think the timing was a little off. Supply should have been ramped up earlier, even before the introduction of the new economic initiative. Still, it is better late than never.

So there is more supply — residential, commercial as well as industrial. Need we be worried about the impact? For some developers and landlords, perhaps, but not for the rest of us. For too long we have been held hostage to the high-cost environment.

In any case, with no clarity on the interest rate front, I think it is premature to worry about the oversupply — particularly for non-residential properties. As for residential property and private housing in particular, I think the Monetary Authority of Singapore probably feels it has done enough to rule out a panic decline or market collapse.

About the author:

Colin Tan is director, research and consultancy at Suntec Real Estate.