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PR Newswire
03-01-2011, 08:15 AM
Jan 3, 2011
CAI JIN
Don't take low interest rates for granted
By Goh Eng Yeow
YOU don't have to look very far to see signs of the economic boom in Singapore.
Banks are lending heavily again, with business loans topping an estimated $166 billion in October. This is well above the previous record $163 billion dished out in October 2008, before the global credit crunch struck early 2009.
The red-hot residential property market seems unstoppable. Despite a slew of stiff measures put in place by the Government in August to curb speculation, the market quickly sprung back to its feet.
November sales of 1,909 units brought the total number of new homes sold for the first 11 months to 15,025 - surpassing the old mark of 14,811 in 2007.
Property consultant Knight Frank estimates that investors poured more than $21.4 billion into the local market last year - or well above 2009's lacklustre $5.8 billion.
Yet amid all this exuberance, the benchmark Straits Times Index rose only 11 per cent in 2010 - and it is still 20 per cent below the all-time high of 3,831.19 reached in October 2007.
And while the residential market is booming, the exuberance has yet to rub off on the property counters. The bellwether stock CapitaLand is trading at 47 per cent off 2007's all-time high of $7.13.
Still, it is not difficult to fault investors for their cautious outlook on equities.
As Bank of America Merrill Lynch observed in its latest survey of fund managers, the biggest bug-bear confronting investors is rising inflation in the months ahead.
So as the stock market party gets into full swing, institutional investors are also wary that central banks may snatch away the punchbowl by raising interest rates to fight rising prices.
It also comes as scant consolation that as they were enjoying the year-end festivities, China jacked up lending rates on Christmas Day, the second rise in almost two months.
So at the back of the minds of many investors is a fear that other Asian countries might have to follow in China's footsteps and tighten up on their money supply.
'China is likely to be the epicentre of an Asian bubble. The situation in the West is critical in terms of how the Asian cycle evolves,' said CLSA equity strategist Chris Wood in his outlook for this year.
To ward off the risk of an asset bubble triggered by the extremely easy monetary policy in the West, he said Asian governments would have to be very aggressive in hiking interest rates.
However, like many other analysts, he believed that any tightening by Asian central banks would be confined to 'addressing symptoms of the bubble risk, such as higher property prices, rather than the cause for it'.
But interest rates cannot stay at their current historic low levels forever. Investors may simply be putting a huge risk premium into the price of property counters in case the tide turns on the booming housing market.
As the late Nobel Prize laureate Fredrich August Hayek argued, low interest rates interfere with economic calculations and cause businessmen to invest in projects that would not otherwise have appeared profitable.
This then results in huge losses as customer demand fails to meet forecasts that turn out to be wildly optimistic. In particular, he cited long-term projects as being highly sensitive to interest rates and therefore more susceptible to such distortions.
The argument is just as apt when it is applied to the local residential property market.
Take a couple who take out a $1 milion, 20-year loan to buy a condominium unit.
A back-of-the-envelope calculation will show that at the ultra-low mortgage rate of 1 per cent charged by some banks, they will need to fork out $5,000 in monthly instalments.
But if mortgage rates rise to 3 per cent - a distinct possibility considering that they varied from 1 per cent to 7 per cent in the past decade - their monthly instalment will jump by 33 per cent to $6,667.
To paraphrase Mr Hayek, in hindsight, that dream condo might not appear to be such a steal after all, as they harbour to service their loan under a crushing interest burden.
Those with long memories will recall the destruction of previous property market bull-runs following a series of interest rates hikes by the US central bank, which forced our local rates to be jacked up as well.
In 1981, the then-exuberant local property market was spooked when then US central bank chief Paul Volcker hiked rates to an unbelievable 25 per cent to squeeze inflation out of the US economy.
Prices failed to regain 1981 record high levels for the next 12 years until Mr Volcker's successor, Mr Alan Greenspan, made deep cuts to US interest rates between July 1990 and September 1992 to coax the US economy out of recession.
History then repeated itself in 1998, with property prices going into a downward spiral as the Asian financial crisis took hold.
Despite a brief recovery in 1999, property stayed in the doldrums for six years and only regained 1996 highs in 2006.
So the question to ask is whether history will repeat itself as homeowners survey the sky-high prices in the local residential market and wonder if the rally has legs.
Over the past 20 years, on average, it had taken the US Fed four years to switch gears from cutting interest rates to raising them.
By coincidence, next year will mark the fourth year since the Fed started its interest-rate cutting spree.
Some analysts believe that the Fed may stay its hands in trying to drain liquidity out of the banking system because of the upcoming US presidential elections. But others feel that it might have no choice but to raise interest rates, if prices surge too fast.
As taking a huge loan to buy a spanking new condo is a long-term commitment, a homeowner should take a possible interest rate hike into consideration.
It is best not to take the current low interest rates for granted.
CAI JIN
Don't take low interest rates for granted
By Goh Eng Yeow
YOU don't have to look very far to see signs of the economic boom in Singapore.
Banks are lending heavily again, with business loans topping an estimated $166 billion in October. This is well above the previous record $163 billion dished out in October 2008, before the global credit crunch struck early 2009.
The red-hot residential property market seems unstoppable. Despite a slew of stiff measures put in place by the Government in August to curb speculation, the market quickly sprung back to its feet.
November sales of 1,909 units brought the total number of new homes sold for the first 11 months to 15,025 - surpassing the old mark of 14,811 in 2007.
Property consultant Knight Frank estimates that investors poured more than $21.4 billion into the local market last year - or well above 2009's lacklustre $5.8 billion.
Yet amid all this exuberance, the benchmark Straits Times Index rose only 11 per cent in 2010 - and it is still 20 per cent below the all-time high of 3,831.19 reached in October 2007.
And while the residential market is booming, the exuberance has yet to rub off on the property counters. The bellwether stock CapitaLand is trading at 47 per cent off 2007's all-time high of $7.13.
Still, it is not difficult to fault investors for their cautious outlook on equities.
As Bank of America Merrill Lynch observed in its latest survey of fund managers, the biggest bug-bear confronting investors is rising inflation in the months ahead.
So as the stock market party gets into full swing, institutional investors are also wary that central banks may snatch away the punchbowl by raising interest rates to fight rising prices.
It also comes as scant consolation that as they were enjoying the year-end festivities, China jacked up lending rates on Christmas Day, the second rise in almost two months.
So at the back of the minds of many investors is a fear that other Asian countries might have to follow in China's footsteps and tighten up on their money supply.
'China is likely to be the epicentre of an Asian bubble. The situation in the West is critical in terms of how the Asian cycle evolves,' said CLSA equity strategist Chris Wood in his outlook for this year.
To ward off the risk of an asset bubble triggered by the extremely easy monetary policy in the West, he said Asian governments would have to be very aggressive in hiking interest rates.
However, like many other analysts, he believed that any tightening by Asian central banks would be confined to 'addressing symptoms of the bubble risk, such as higher property prices, rather than the cause for it'.
But interest rates cannot stay at their current historic low levels forever. Investors may simply be putting a huge risk premium into the price of property counters in case the tide turns on the booming housing market.
As the late Nobel Prize laureate Fredrich August Hayek argued, low interest rates interfere with economic calculations and cause businessmen to invest in projects that would not otherwise have appeared profitable.
This then results in huge losses as customer demand fails to meet forecasts that turn out to be wildly optimistic. In particular, he cited long-term projects as being highly sensitive to interest rates and therefore more susceptible to such distortions.
The argument is just as apt when it is applied to the local residential property market.
Take a couple who take out a $1 milion, 20-year loan to buy a condominium unit.
A back-of-the-envelope calculation will show that at the ultra-low mortgage rate of 1 per cent charged by some banks, they will need to fork out $5,000 in monthly instalments.
But if mortgage rates rise to 3 per cent - a distinct possibility considering that they varied from 1 per cent to 7 per cent in the past decade - their monthly instalment will jump by 33 per cent to $6,667.
To paraphrase Mr Hayek, in hindsight, that dream condo might not appear to be such a steal after all, as they harbour to service their loan under a crushing interest burden.
Those with long memories will recall the destruction of previous property market bull-runs following a series of interest rates hikes by the US central bank, which forced our local rates to be jacked up as well.
In 1981, the then-exuberant local property market was spooked when then US central bank chief Paul Volcker hiked rates to an unbelievable 25 per cent to squeeze inflation out of the US economy.
Prices failed to regain 1981 record high levels for the next 12 years until Mr Volcker's successor, Mr Alan Greenspan, made deep cuts to US interest rates between July 1990 and September 1992 to coax the US economy out of recession.
History then repeated itself in 1998, with property prices going into a downward spiral as the Asian financial crisis took hold.
Despite a brief recovery in 1999, property stayed in the doldrums for six years and only regained 1996 highs in 2006.
So the question to ask is whether history will repeat itself as homeowners survey the sky-high prices in the local residential market and wonder if the rally has legs.
Over the past 20 years, on average, it had taken the US Fed four years to switch gears from cutting interest rates to raising them.
By coincidence, next year will mark the fourth year since the Fed started its interest-rate cutting spree.
Some analysts believe that the Fed may stay its hands in trying to drain liquidity out of the banking system because of the upcoming US presidential elections. But others feel that it might have no choice but to raise interest rates, if prices surge too fast.
As taking a huge loan to buy a spanking new condo is a long-term commitment, a homeowner should take a possible interest rate hike into consideration.
It is best not to take the current low interest rates for granted.
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