The Singapore economy has had a good run in recent years despite challenges such as the pandemic, high inflation and the fastest global monetary policy tightening in 40 years. The economy has quickly made up for the output lost as a result of the pandemic and has weathered the surge in inflation and the turbulence in financial markets. It also garnered a record-shattering level of foreign direct investment in high-value manufacturing activities in 2022 while strengthening its position as a global financial hub.
Downsides
But the good economic performance comes with some downsides. The surge of capital into the city-state has pushed up property prices and the cost of rented accommodation. That poses several challenges for policymakers. Not only are higher property prices unpopular with younger voters, they could also turn into a bubble and pose financial stability risks in time. The International Monetary Fund noted last year that home prices were already above their long-term fundamental value. Private home prices have increased by 28.1% since the first quarter of 2020, with the pace of price expansion remaining a worry through the early part of this year.
Rising housing costs could weaken Singapore’s competitiveness in attracting the foreign talent it needs
Rising housing costs could weaken Singapore’s competitiveness in attracting the foreign talent it needs. Rents for private homes surged by 29.7% year on year in 2022, the fastest pace since 2007. Expatriate professionals have complained loudly about how unaffordable Singapore is becoming, and multinational companies may respond by relocating some operations away from Singapore.
It is also worth noting that there is a broader problem of asset price inflation that goes beyond home prices. For example, Singapore has a unique approach to managing traffic congestion, auctioning off the quota-limited certificates of entitlement needed to own a car in the city-state. The certificates are in effect assets, and their prices have reached record highs.
Response
But reining in property prices is difficult. The authorities ramped up measures to cool the sector in April, most notably by a doubling of the additional buyers’ stamp duty to 60% for foreign buyers of Singapore property. Previous interventions such as the increase in buyers’ stamp duty for higher-value properties in February 2023 and a wide range of measures in September 2022 did not sufficiently dampen the surging prices of homes.
New homes will take time to materialise and many believe they will not be enough
The government has also been trying hard to expand the supply of new homes. The public housing construction programme is accelerating, with a 35% hike in the target for new flats this year, and the government has promised to expand land sales to increase the supply of private housing. However, the new homes will take time to materialise and many analysts believe they will not be enough to meet the growing demand anyway.
More required
The recent cooling measures are stringent enough to slow the pace of home price appreciation for a while. However, a more extensive recalibration of policies may be needed if further bouts of asset price inflation are to be avoided.
First, the government will almost certainly have to further accelerate the construction of new public housing while providing more land for private home construction. That will be positive for economic growth given the large multiplier benefits of housing construction. But for the policy to succeed, the authorities will also have to ease up on its restrictive approach to importing the foreign labour that the construction industry depends on.
Second, the investment demand for property needs to be addressed. The dearth of attractive equities and bonds leads Singaporeans to acquire a second or third property as a form of savings. The data shows that Singaporeans tend to allocate a higher share of their savings to property than in other developed countries, raising demand and thereby prices. A longer term strategy to revitalise the moribund local equity market may be needed. Introducing more savings options such as pension plans would also help.
Ultimately, an uncomfortable level of housing price inflation may well be the price Singapore has to pay for being a global heart of finance and commerce. Drastic measures to suppress demand and expand supply can help mitigate this but will not entirely eliminate the problem.
