Uncertainty in global economy expected to affect private residential market

By Lee Nai Jia

/ DTZ, The Edge Property |

September 6, 2015 9:00 AM SGT

The Singapore private residential market saw an improvement in 2Q2015, with sales picking up 47% q-o-q to 3,867 units. Foreign purchases also picked up, increasing by 60% q-o-q to 1,025 units. However, there are concerns that the rebound may be short-lived, as global markets have been sent into a tailspin by China’s slowing economy and the devaluation of the renminbi.

China’s underperforming industrial sector and recent currency moves have affected the currencies of commodity exporters, which include Indonesia and Malaysia. Malaysia’s ringgit, at its 17-year low, slid to 3.05 to the Singapore dollar on Aug 26. The Indonesian currency has also weakened, falling 3.4% q-o-q to IDR9, 769 to one Sing dollar in 2Q. In other words, the purchasing power of Chinese, Malaysian and Indonesian nationals have weakened considerably.

Given that these buyers account for more than 50% of foreign purchases of Singapore homes, the market may succumb to a further drop in sales as properties become more costly for them. The falling rupiah, coupled with the slowdown of Indonesia’s economy, led to a decline of Indonesian home purchases by 34% y-o-y to 77 transactions over the same period (see Chart 1).

Chart 1

On the other hand, historical trends of the renminbi and the ringgit to the Sing dollar suggest a considerably weaker correlation between currency depreciation and property purchases. DTZ’s research found that the weaker renminbi and ringgit may not have a statistically significant, negative impact on sales historically.

On the contrary, we found the volatility of both currencies to be the main driver of sales. We measured the volatility of the exchange rate by taking the variance of the ratio of the foreign currency against the Sing dollar over a rolling window of four quarters. Results suggest that the higher volatility in the ringgit exchange rate leads to more home purchases by Malaysians, although the impact tends to be lagged (see Chart 2). Likewise, there were more Mainland Chinese home purchases when the renminbi was more volatile (see Chart 3).

Chart 2

Chart 3

Given that the volatility of the exchange rate of foreign currencies reflects the economic and political risk of a country, our findings suggest that Mainland Chinese and Malaysian buyers purchase homes for risk diversification. Therefore, cost would be less of a consideration to them. Additionally, they are attracted to the political and institutional stability in Singapore. While the results can be extrapolated to recent events, the anticipation of an increase in Mainland Chinese home purchases needs to be tempered because the process of remitting renminbi to pay takes more time.

Regardless, we anticipate that the fallout from the renminbi’s devaluation and the financial market turmoil will affect local home purchases through the stock market. DTZ Research found that the Straits Times Index was strongly correlated to the URA property price index at a coefficient of 0.81. It is not surprising that the correlation was so strong, as the fall in the STI not only affected the sentiment of local homebuyers and moderated their price expectations, but the decline also implied a fall in the net wealth of prospective buyers (see Chart 4).

Chart 4

As recent events suggest a weakening of the global economy, the US Federal Reserve may delay raising interest rates, especially if the Chinese government fails to stem the rapid slowdown in its economy. While this may cushion any decline in house prices, it is also likely that the Fed may proceed to increase rates based on its earlier economic figures. However, the impact of any increase in rates is likely to be muted by the CPF contributions local buyers use to finance their mortgage payments.

Dr Lee Nai Jia is regional head (Southeast Asia), research, DTZ. He can be contacted at naijia.lee@dtz.com.

This article appeared in The Edge Property Pullout of Issue 693 (September 7) of The Edge Singapore.

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