Monday, July 25, 2005

The Coming Singapore's Property Bubble?

Is there a property bubble looming ahead of us? On July 19, the National Development Minister announced several liberalization measures that would encourage more participation in the residential property market. The cash downpayment for a property buyer is reduced from 20% to 10%. This is represented as Box 1 in the diagram. This should eventually lead to Box 2, i.e., more mortgages will be written. What is next is interesting.

If lending institutions chose to raise mortgages rates (Box 3), then this will moderate Box 2 (represented by a dashed arrow), and any property bubble is nipped in the bud.

If mortgage rates are static or only marginally increased, a more rapid take up rate could lead to rising property values (Box 4). In such a situation, the expectation of higher property prices will create a reinforcing loop between Box 2 and Box 4 leading eventually to a full blown property bubble. At that point only very severe economic news (this will be a shock) or government measures to deflate the bubble will reverse the trend of rising prices.

Now everyone is watching which scenario it would be. I am sympathetic to rising property prices after a slow start.

Latest: I just caught this at ChannelNewsAsia site to support this thesis. See "Developers say strong sales due to recent policy changes "

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