S'pore home prices soar, but not invincible

By Romesh Navaratnarajah: Singapore home prices have remained among the highest in the world amid challenges faced by the economy this year. Since the global financial crisis, prices have soared 56 percent and this is expected to continue in 2013, even as sales volumes decline due to the government's cooling measures.

In fact, prices have stayed on an upward trend with a 0.5 percent increase in Q3 2012, according to data from the Urban Redevelopment Authority (URA). But home prices are still vulnerable.

According to Michael Wan, research analyst at Credit Suisse, there are two scenarios that could lead to a decline in prices – a deep slump in economic growth and higher interest rates.

Firstly, interest rates which fuel residential demand are now near record lows at 0.4 percent, based on the Singapore Interbank Offered Rate (SIBOR), a benchmark rate for home loans.

But Wan predicts that if SIBOR increases to seven percent in the next five years, prices could drop by up to 14 percent within that period. Such a scenario last took place in 1998.

"To see a return to such a high rate would probably require either a huge positive growth shock (in the U.S.) and/or a very sharp pick-up in inflation in the U.S. economy," said Wan.

Second of all, a "growth shock" could also fracture housing prices. Wan said that if the country's economy grows just 0.4 to 0.5 percent per year in the next five years, prices could decline by 16 percent.

While economic forecasts are positive, a fall in prices is not entirely impossible, Wan explained "given our previous estimate that a full-blown euro zone breakup would cause Singapore's gross domestic product to contract by more than nine percent". Romesh Navaratnarajah, Senior Editor of PropertyGuru, wrote this story. To contact him about this or other stories email romesh@allproperty.com.sg Related Stories: Experts expect EC demand to strengthen

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