Singapore property market could see limited impact from tightened monetary policy

Jan 25, 2022

ECONOMISTS do not expect a slight appreciation in the Singapore dollar (SGD) to deter foreign property developers and buyers. Some say it may even be a boon.

The Monetary Authority of Singapore's (MAS) latest tightening of policy could therefore have only a small overall impact on real estate in the Republic.

The central bank on Jan 25 said it will "slightly" raise the rate of appreciation of its policy band, amid rising inflation pressures.

Vishnu Varathan, head of economics and strategy at Mizuho Bank, sees the impact on the property market as negligible, given that foreign investors mostly think in US dollar (USD) terms and that global forces may subdue the measured currency considerations implied by the MAS move.

As the Fed accelerates the pace of hiking interest rates and amid geopolitical tensions, Mizuho projects an upside drive to S$1.36-1.38 for USD/SGD in H1 2022, and potentially as high as S$1.40 if capital outflow risks gather pace.

"But by the end of 2022, we think the Sing dollar will test S$1.33, potentially S$1.32," Varathan added. This is expected on the back of some dial back in the Fed's hawkish tone, as well as a narrowing disparity between the Fed and the European Central Bank, which will lead to the euro moving up and the greenback pulling back.

With the MAS poised to tighten further, this may even inadvertently motivate foreign buyers to invest in Singapore, thanks to the prospect of a stable Sing dollar which is likely to appreciate over the longer term, he suggested. "Buyers have got a lot more faith in the Sing dollar being a lot more stable because of its trade weighted policy. Buying property is not an intra-year investment decision," he pointed out. "It might provide more confidence to buyers."

CIMB Private Banking economist Song Seng Wun also expects foreign buyers to take a long-term perspective. "They tend to think of exchange rate risk as small because the Sing dollar appreciates say, over 10 years, 20 years, versus regional currencies." A bigger consideration is that Singapore remains relevant both as a business centre and a safe haven.

Similarly, the exchange rate is not high on the list of risk considerations when foreign developers are acquiring sites, Song reckoned. In this respect, the latest wave of cooling measures introduced amid rapidly rising prices in the private and public housing markets should have more of an impact on tempering bids for land sites. The Urban Redevelopment Authority's flash estimates indicated that private residential prices climbed 10.6 per cent in 2021, more quickly than the 2.2 per cent growth in 2020.

A stronger SGD could benefit property market participants in some cases. For developers, a higher exchange rate will imply lower imported inflation, which means imported construction materials will become cheaper, said Lee Nai Jia, deputy director of the Institute of Real Estate and Urban Studies at the National University of Singapore.

"That said, I expect the costs of materials to remain high because of the increased shipping costs. Labour costs are also still high, although the situation has improved," Dr Lee said.

Foreign developers that already have existing projects in Singapore could be the primary beneficiaries, as an appreciation in the SGD will be reflected as paper gains for these companies, he added.

That may prompt these foreign developers to re-invest their profits in Singapore property development, if they are expecting the currency to strengthen further. However, another possibility is that they review their strategy and reallocate their capital and earnings to other markets, Dr Lee said.

Meanwhile, he flagged that in the event the SGD actually ekes out meaningful gains, there is a chance that mortgage rates could rise earlier than expected. "With expectations of a stronger exchange rate, more capital is likely to enter Singapore, and money supply may decrease. The decrease in liquidity could then drive up interest rates."

The Republic's interest rate benchmark, the Singapore Overnight Rate Average (Sora), is the volume-weighted average borrowing rate in the unsecured overnight interbank SGD cash market in Singapore. US rates and global market movements also partly influence Singapore's domestic interest rates.

Real estate developers will face higher borrowing costs if and when interest rates increase, thus narrowing their margins further, Dr Lee said.

In the collective-sale market, some developers could turn more cautious to avoid overstretching themselves in the event of higher borrowing costs, he noted. En bloc activity had already begun losing momentum since the new property curbs kicked in.

Additionally, developers may worry about the potential effects of a stronger SGD and higher interest rates on demand for units in the redeveloped project. Those factors could lead to higher acquisition costs for foreign homebuyers in particular, on top of the recent hike in additional buyer's stamp duty rates. "To the equity constrained buyers, it will further lower their budget for homes," Dr Lee said.

"The en bloc market could therefore remain quiet for some time, unless the owners of the existing developments become more flexible in their asking prices," he added.