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Published November 13, 2006

Rising stock market leads property prices by a year

Connection is strongest with the most expensive segment of the housing market


(SINGAPORE) Stock market rallies are often behind a surge in housing prices - but there is a one-year lag, according to a BT analysis.

Comparisons of the Straits Times Index and URA residential property index back to 1975 show the correlation is strongest when the measurements are a year apart. And recent figures appear to confirm this.

The ST Index bottomed out at the end of first-quarter 2003 and started rising from the second quarter. A year down the track - in Q1 2004 - the URA residential property index sank to its lowest point in seven years or so, then started climbing, with momentum picking up in the past five quarters.

In a downturn, the property market may react faster to the stock market. For example, the dotcom bubble burst in Q1 2000. The property index started weakening by Q3 that year - by about 2.8 per cent quarter-on-quarter. But it was in Q1 2001 that the slide picked up pace, with the index falling 4 per cent quarter on quarter.

On the lead time for property prices to follow stock prices, Knight Frank's director of research and consultancy Nicholas Mak said: 'Stocks are more liquid and the amount invested is generally smaller. So it takes time for investors to build up their wealth in the stock market before it is sufficient for them to buy a new property or upgrade.'

Also, there is a longer search time for properties, he said. 'It's not like stocks where you can just buy immediately.'

The Bank for International Settlements (BIS) has found a similar leading effect of stock markets on residential property prices in the US, UK, Canada, Ireland, the Netherlands and Australia. And besides the stock market, two other factors precede house price increases - growth of a country's gross national product and a fall in real short-term interest rates.

A September 2002 article in BIS Quarterly Review said that in the UK, for example, a 10 per cent rise in equity prices typically translates into a 5 per cent gain in property prices three years later. In the other countries, the effect is smaller, only one or 2 per cent after three years.

With stock ownership fairly widespread in most of the countries studied, BIS said the correlation between equity and property prices reflects a stock market effect on housing demand. In addition, the stock market is also a predictor of a country's GNP growth.

A separate study in the Netherlands showed that stock market performance has the strongest connection with the most expensive segment of the housing market.

All this is more or less consistent with what has been happening. Between the end of Q1 2003 and Q3 2005 the ST Index - as calculated by Datastream Financial - has risen almost 100 per cent. The property index, meanwhile, has gained 11.2 per cent in the same period. That's about 1.2 per cent per every 10 per cent advance in the STI. And it is mostly top-end properties that have appreciated.

Since Q3 last year the ST Index has gained about a further 20 per cent. So does it mean property prices will continue to climb?

Almost all market players think so. Savills Singapore's director of marketing and business development Ku Swee Yong is so bullish about the 'luxury' market that he believes prices will exceed $4,000 psf by 2010. So far, the highest price paid is $3,000 psf for a small unit at St Regis Residences.

Knight Frank's Mr Mak said: 'I don't think the party will end soon. Optimism and demand will continue to drive up prices.' According to him, the price increase is already spreading to the mid-tier market and slowly to the mass market.

He reckons developers will be testing the market with higher prices at new launches in the coming few months. His forecast is for the URA residential property index to go up 6-12 per cent next year. 'And if we follow the UK model, the upside could be even more - that is, as long as the stock market holds firm.'