Price Fall 'Unlikely To Dent Economy'

Source : The Straits Times, Nov 11, 2008

Sector's downturn manageable, says Citibank report

PRIVATE home prices are on a downslide, but their decline is unlikely to have a major impact on the economy, according to a new report by Citibank.

More than 80 per cent of Singaporeans live in public housing anyway, which is still on a price uptrend, it said. HDB resale prices rose 4.2 per cent in the third quarter, while prices of apartments, condominium units and landed homes fell 2.4 per cent. This was the first decline in four years.

Even private home dwellers who see their property values dip are unlikely to cut back on spending, said the bank. Real estate wealth here is illiquid compared to other countries - meaning it cannot be easily converted to cash - so a fall in home values will have little effect on how much consumers spend.

Citibank economist Kit Wei Zheng estimated that a drop of 15 per cent in the prices of private homes could knock 0.4 to 0.6 percentage point off economic growth.

This would be due largely to lower construction investments as developers delay projects to wait out the downturn, rather than because home owners feel poorer and spend less, he said.

While 'not negligible', the effect of falling private home prices on the economy is 'not particularly large'.

'A housing downturn confined to the private residential segment should be manageable,' said Mr Kit, adding that a slump in exports and financial services would have a more significant drag on Singapore's economy, currently in a technical recession after two straight quarters of negative growth.

Singaporean home owners are often described as 'asset rich, cash poor', because they cannot or are unwilling to unlock the value of their property, Mr Kit noted. If they could do so, they would be able to turn the value of their homes into cash for spending.

Unlike in bigger countries, Singapore has no 'cheap' suburbs where people can buy a similar or even better house and sell their existing one in the city for capital gains, he said.

Singaporeans also tend to have a 'psychological reluctance' to realise the value of their property by downgrading to a smaller, cheaper home.

In countries like the United States, financial instruments such as reverse mortgages allow home owners to get cash for their homes even while they are living in them, added Mr Kit.

With real estate here so illiquid, home prices are not directly related to consumption spending. In fact, the Citibank report says this relationship could be reversed in Singapore: Lower home prices could mean that aspiring home buyers have more money to spend.

Of course, a property downturn also means fewer home sales, which would hit economic growth more than a fall in home prices, Mr Kit said.

A drop in property transactions would eventually lead to a decline in business services, among other things.