Published May 23, 2007
Singapore's real estate bubble won't be pricked
By ANDY MUKHERJEE
ASSET-BUBBLE vigilantes will find little to cheer about with Singapore's falling interbank lending rate. They will be partly right: Cheaper capital is about the last thing the island's frenzied property market needs.
Housing loans by Singapore banks reached $64.3 billion in March. That's the highest on record. With prices of private homes surging the most in seven years in the first quarter, and with rents having already climbed to levels not seen since 1998, it isn't surprising that more people are rushing to take out mortgages.
The trend may amplify if borrowing costs fall: The key three-month interest rate was at a 19-month low of 2.25 per cent on Monday, a percentage-point drop since the end of February. It might be a matter of time before long-term rates follow suit.
Singapore on Monday reported that the economy expanded at a faster-than-expected annualised 7.6 per cent pace in the first quarter. The momentum is coming from a revival in construction, which grew at its briskest rate in nine years.
If the US economy rebounds in the second half of 2007, Singapore's flagging electronics exports may get a boost. That will be a bonus. In such a scenario, cheap money will appear both incongruous and dangerous.
Yet, bubble vigilantes will also be wrong.
Singapore's monetary policy should respond purely to a growth-inflation trade-off. Asset prices are incidental; if the financial system can withstand the risk of exuberance - as Singapore's surely can - the central bank will be unfair to the broader economy by stifling growth too early.
This boom may still have a couple of years to run. With no let-up in global risk appetite, there isn't a dearth of investors willing to take a bet on this emerging Asian play ground of the well-heeled. Singapore will have two casinos by 2010; it's also building the world's largest Ferris wheel; the Public Utilities Board is going all out to turn the city's reservoirs and canals into hotspots for kayaking and waterfront living. Formula One racing is coming to the Central Business District. It's a perfect backdrop for a property boom to run ahead of itself. Indeed, not a day passes without news of an older block of apartments being torn down to be replaced by newer construction. The resulting supply shortage is squeezing the expatriate population - most local Singaporeans live in public housing - by pushing up rents even further. Yet, it isn't stopping a steady inflow of new arrivals. Land owners are tizzy with excitement.
All of this begs the question: Shouldn't monetary policy be playing a cautionary role by leaning against the wind?
The Monetary Authority of Singapore (MAS) doesn't manage interest rates. It buys and sells the Singapore dollar to keep it anchored against an undisclosed basket of trading partners' currencies. The monetary stance, since April 2004, has been one of 'modest and gradual appreciation' in the home currency.
Singapore's foreign exchange reserves have risen by more than US$12 billion in the past year, restricting gains in the currency to less than 4 per cent against the US dollar. Rather than remove the additional liquidity from the banking system by selling bonds and bills, which is what other Asian central banks do to maintain control over money supply in the face of strong capital inflows, MAS follows a more hands-off approach. That's because domestic money supply doesn't have much impact on consumer price inflation in an island of 4.5 million people.
From an asset bubble perspective, the strategy isn't without its risks. If property is hot, stocks are no less so. The benchmark Straits Times Index rose to a record on Monday.
'Sustained liquidity expansion could exert undesirable macro effects in the medium term,' Yen Ping Ho, a JPMorgan Chase & Co currency strategist, said in a May 18 note. 'While inflation remains low, rising financial asset prices and booming housing activity should increasingly be a source of concern.'
There is talk that Singapore is intentionally targeting lower interest rates because it wants to avoid becoming a target of carry traders by offering them high yields.
The MAS issued a clarification on Monday, denying that the fall in local interest rates was deliberate. 'Recent movements reflect market forces,' it said.
Those who believe all central banks should be in the business of pricking bubbles will find the Singapore authority's stance unsatisfactory. But the MAS will be prudent to react only if runaway asset prices spill over into consumer prices. That is what it did between 1991 and 1994. Capital is under-priced on a global scale. A small, open economy like Singapore can't buy insurance against an eventual return of financial risk. Vigilantes should look elsewhere. - Bloomberg
Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own