Income, not interest, led to property boom - Singapore

Income, not interest, led to property boom - Singapore

(SINGAPORE) The recent climb enjoyed by equity and property prices was driven more by strong economic growth than by low interest rates, according to a study by the Monetary Authority of Singapore (MAS).
 
Price dynamics: Asset price inflation reflects an underlying increase in income growth augmented in part by favourable sentiment towards domestic assets, says the study 
Empirical research by MAS shows that economic activity exerts a larger influence on asset prices in Singapore than borrowing costs.

‘Asset price inflation reflects an underlying increase in income growth augmented in part by favourable sentiment towards domestic assets,’ says the study, featured in the MAS macroeconomic review report released yesterday.

The MAS report also says: ‘This linkage has been misunderstood by some analysts, who expressed concern that the increase in domestic liquidity, in and of itself, has fuelled the run-up in asset prices.’

Private housing prices increased by 31.2 per cent for 2007 as a whole, and some market analysts had felt that the central bank should raise interest rates to rein in property inflation.

This was because while overseas investors were driving property prices up, the inflow of foreign funds continued to add to domestic liquidity and kept borrowing costs low.

But as the MAS report mentions, ‘the factors behind the increase in liquidity are much more complex in view of Singapore’s monetary policy framework’.

Domestic interest rates have dropped since September last year as US interest rates fell and the Singapore dollar grew stronger.

The benchmark three- month domestic interbank rate fell by 144 basis points from August 2007 to 1.31 per cent at the end of March 2008.

As interbank rates fell, banks also started offering cheaper and more innovative mortgage packages.
Source : Business Times  - 30 April 2008

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