Published October 25, 2008

Singapore Economic Policy Conference

Private property prices seen falling 5-6% in '09-10

This will be so even under NUS economist's best-case projection for the Singapore economy


PRIVATE property prices will fall 5-6 per cent in the next two years even if the Singapore economy holds up, according to an economist's projections.

National University of Singapore economist Tilak Abeysinghe's forecasts see the domestic economy growing 3 per cent in 2009 - and one percentage point higher and lower under the best and worst-case scenarios.

In all three scenarios though, his simulations result in 5-6 per cent price falls a year in 2009 and 2010. Only in the optimistic outlook is there a projected 1.4 per cent rebound in 2011.

Already, the latest official figures show a 2.4 per cent dip in private housing prices in the third quarter from Q2 - the first decline since the property market bottomed out in 2004.

Housing prices tend to accelerate faster than expected during upswings and fall faster than expected during downswings, Dr Abeysinghe noted. He presented his findings yesterday at the Singapore Economic Policy Conference, jointly organised by the three local universities.

Since 1975, private property prices here have risen about 7 per cent a year - and with the uptrend, housing affordability has declined over the years.

Dr Abeysinghe's findings show the housing affordability index for private home owners at the lower end of the income range (up to the 25th percentile) fell to 0.5 in 2007, from near-two in the late-1970s.

An index of exactly one means the household's lifetime income is just enough to pay for the property. A measure below one implies 'perpetual debt' for the household.

The affordability index for private property owners in the medium income group averaged 1.2 over the period 1980-2007. This implies that if the household bought a property that cost $1 million, it would be left with $200,000 of income over its lifetime.

For high-income households, the index is a stronger 2.1 over the period 1980-2007. That's still well below the index for HDB households - which ranges from three for the low-income group to 9.4 for the richest.

So while rising home prices spell higher wealth for individuals, the economy as a whole may not be 'better off' if highly-geared households have less to spend, Dr Abeysinghe says, alluding to the paradox of thrift.

More predictable increases in property prices that do not erode long-term affordability are desirable and needed for the economy's health.

The conference also heard from Nanyang Technological University professor Choy Keen Meng that policy efforts to reduce inflation by one percentage point would result in about a two-point fall in GDP growth.

This 'sacrifice ratio' of two compares with around 3-4 for the US and an average 2.5 for the OECD.