QE3 : Implications for Hong Kong and Singapore's Property Markets

QE3 : Implications for Hong Kong and Singapore's Property Markets
ASIA | white paper | September 2012

                                      QE3 : Implications for
                                      Hong Kong and Singapore’s
                                      Property Markets
                                      The subprime crisis in the United States in 2008 and recent prolonged sovereign
                                      debt issues in the euro zone have put the global economy on the verge of a recession.
                                      While the US government’s decision to pour massive liquidity into the economy
                                      enabled the banking system to survive major disruption, there has not yet been any
                                      visible recovery in the country’s job market.

                                      Following two rounds of quantitative easing (QE1 and QE2) since 2008, the Federal
                                      Reserve announced a third round (QE3) on 13 September 2012, in an attempt to
                                      keep interest rates low and to simulate the economy and job growth.

                                      This increased liquidity is having an impact on Asia, where it has pushed up the
                                      prices of commodities, including real estate. The situation is particularly evident in
                                      countries who have pegged their local currency to the US dollar. So, while the global
                                      economy continues to struggle to achieve a clear-cut recovery, Asia’s economies
                                      face the additional challenge of asset price inflation.

                                      Hong Kong’s residential real-estate prices have risen by 55% since QE1 was
                                      announced in late 2008. However, its effect on private residential prices in Singapore
                                      has been less pronounced. The residential price index there increased by a more
                                      modest 27.1% between the end of 2008 and the second quarter of 2012.

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QE3 : Implications for Hong Kong and Singapore's Property Markets
ASIA | QE3 : Implications for Hong Kong and Singapore’s Property Markets

                                          The recent implementation of QE3 may jack up real asset prices further, thus
                                          heightening the risk of asset price bubbles in Asian regions and countries such as
                                          Hong Kong and Singapore. This report examines its possible impact on the local
                                          residential property sector in those two places by analysing the correlation between
                                          US Treasury Bond (TB) yields and their residential property prices.

                                          Further Increase in Residential Prices
                                          Hong Kong residential prices increased by 37% during QE1 (Dec. 2008 to March
                                          2010) and 15% during QE2 (Nov. 2010 to June 2011). Over the long-term, these
                                          rounds of QE actually reduced US bond yields. For instance, US 10-year TB yields
                                          declined from about 4% just before QE1 in Nov. 2008 to 1.57% in Aug. 2012. Hong
                                          Kong property prices increased by 55% during the same period. The downward
                                          trend of US bond yields actually corresponded closely to the upward trend of
                                          property prices in Hong Kong.

                                          Implementation of QE3 is likely to push US bond yields down further during the
                                          coming months, enough to test its all-time low (i.e. 1.39%). If past experience is
                                          anything to go by, Hong Kong residential property prices are likely to increase by
                                          about 2% for every reduction of 10 basis points in US bond yields. While Singapore
                                          property prices are set to increase, the degree of upside would depend on how much

                                                                                              Source: www.treasury.gov; Colliers International

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ASIA | QE3 : Implications for Hong Kong and Singapore’s Property Markets

                                          lower US bond yields can go. Colliers International is forecasting that Hong Kong
                                          residential prices will edge up by 5% over the next 12 months.

                                          There is less correlation between the decline of US bond yields and Singapore
                                          residential prices. The latter increased by 7.5% during QE1 and 4.2% during QE2.
                                          While the residential market will undoubtedly react to QE3 to some degree, this will
                                          probably take the form of a limited, short-term boost in buyer sentiment that will
                                          probably peter out before the end of 2012.

                                          Approximately 80% of Singapore’s population live in public housing units, which
                                          only citizens and permanent residents can purchase. This substantial portion of the
                                          city state’s housing stock is under the government’s control, and it provides a basic
                                          housing platform that is not directly susceptible to foreign capital flows. That is the
                                          main reason why Singapore’s private residential market did not react as intensely as
                                          Hong Kong’s did in the past, and it probably will not do so in the future.

                                                                                                Source: www.treasury.gov; Colliers International

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ASIA | QE3 : Implications for Hong Kong and Singapore’s Property Markets

                                              Since 2009, the Singapore government has instituted measures to limit overheating
                                              in the residential market on five different occasions. The most recent of these
                                              targeted foreigners and corporate entities with an additional buyer’s stamp duty of
                                              10%. Currently, the main source of demand comes from local purchasers. There
                                              would probably be buyer resistance if prices increased significantly in the short-
                                              term. Local property developers are aware of and sensitive towards that possibility.

                                              Therefore, the current round of QE could give buyer sentiment a temporary shot
                                              in the arm, provoking a short-term knee-jerk reaction that might see residential
                                              prices increasing by around 2% to 3%. Yet the history of QE announcements and
                                              their impact on the Singapore residential market indicates the effect is unlikely to
                                              last for more than a couple of quarters before prices stabilise and flatten out. Thus,
                                              residential prices are expected to edge up by only 2%-3% during the next 12 months.

                    Quantitative Easing                        QE1                    QE2                    QE3

                    Period                                     Dec 2008 - Mar 2010    Nov 2010 - Jun 2011    Sep 2012 - ?
                    No. of months                              16                     7                      -
                    Hong Kong Property Prices (% growth)       37%                    15%                    -
                    Singapore Property Prices (% growth)       7.5%                   4.2%                   -

                                                                                                                 Source: Colliers International

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ASIA | QE3 : Implications for Hong Kong and Singapore’s Property Markets

                                                                                      Threat of Inflation Reappears in Asia
                                                                                      More liquidity is expected to enter the global markets now that QE3 is in place.
                                                                                      Although a certain amount of that will go into the real economies, hot money is
                                                                                      likely to be parked temporarily in a range of commodities (e.g. precious metals and

                                                                                      Inflation in China has eased off from 6.5% in July 2011 to 1.8% in July 2012, due to
                                                                                      the global economic slowdown. Singapore’s inflation rate has declined from 5.7% in
                                                                                      August 2011 to 4.0% in July 2012. Nonetheless, it is expected to average 4.0%-4.5%
                                                                                      throughout 2012. In Hong Kong, inflation eased significantly from 7.9% in August
                                                                                      2011 to 1.6% in July 2012. However, a surge in food prices triggered an uptick to
                                                                                      2.0% in August. We cannot rule out the possibility that Q3 may result in a revival of
                                                                                      inflation during the next 6 to 12 months.

                                                                                                                                             Inflation Trends
                                                                                                                           (Hong Kong, Singapore and China)



                           % change year-on-year


























                                                                                                         Hong Kong                                                        Singapore                                                       China

                                                                                                         Source: Census & Statistics Department of HKSAR Government; Statistics Bureau of China; www.singstat.gov.sg/

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ASIA | QE3 : Implications for Hong Kong and Singapore’s Property Markets

                                          Q. Are the measures currently in place sufficient to prevent the property
                                          market from overheating in view of the likely influx of foreign funds
                                          following QE3?

                                          We believe the Hong Kong Monetary Authority’s recent measure to lower loan-to-
                                          value ratios (LTVs) from 50% to 40% for second residential properties may help to
                                          slow the growth of property prices. Yet they will not effectively stop it altogether.
                                          No doubt many end-users who lack additional equity will hold back from entering
                                          the market, but corporate investors with strong balance sheets and cash buyers will
                                          be little affected by the tightening of LTVs. The main reason is that the US dollar is
                                          expected to weaken further in the near future, which would be reflected by a decline
                                          in US bond yields. Hong Kong residential prices denominated in the local currency
   The government’s existing              (which is pegged to the US dollar) are expected to appreciate amid expectations of
                                          a feebler US dollar.
   measures should therefore
   be sufficient to contain any           There has been little participation by foreign buyers in Singapore’s private
                                          residential market recently. Foreign buyers accounted for only slightly more than
   surge of capital inflows               6% of transactions during the eight months from January to August 2012. This
   into the market as a result            strongly suggests they are feeling the effects of the extra 10% stamp duty payable by
                                          non-residents. The government’s existing measures should therefore be sufficient to
   of QE3                                 contain any surge of capital inflows into the market as a result of QE3. Moreover, it
                                          will remain watchful, and it will definitely implement more measures if there are any
                                          signs that the current ones cannot avert a spike in demand.

                                          Q. Will QE3 spur more capital inflows and heat up the property market?
                                          Is there a risk of an asset bubble?

                                          As an indicator of the volume of capital inflows, the daily turnover volume of the
                                          Hong Kong stock market increased by around 25% during the last two rounds of QE.
                                          Therefore, it very likely that the latest round of QE will again boost the flow of capital
                                          into Hong Kong stocks and real estate, thus driving up real estate prices.

                                          Although the risk of an asset bubble is increasing, there is no imminent threat of it
                                          bursting, due to Hong Kong’s healthy job market and the city’s low unemployment
                                          rate of 3.2%. Meanwhile, local banks are being very prudent and selective about
                                          offering mortgage financing to their customers. They are putting applicants through
                                          a number of stress tests to assess their ability to replay loans. The average loan-
                                          to-value ratio for newly approved mortgage loans has generally remained below the
                                          long-term historical average of 62% since the beginning 2010. This indicates the
                                          local banking sector has remained sound, and that it has built up firewalls to weather
                                          the effects of any unforeseen decline in property prices.

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ASIA | QE3 : Implications for Hong Kong and Singapore’s Property Markets

                                                                                      Source: Hong Kong Monetary Authority; Colliers International

                                          There is less risk of any asset bubble building up in Singapore’s property market. The
                                          impact of foreign capital inflows on the residential market was most evident when
                                          prices rose by 7.5% during QE1 in 2009. However, QE2 hardly made a mark, as the
                                          price increase of 4.2% during that period stemmed mainly from local purchases.
                                          It should be noted that the residential market’s stability during both QE1 and QE2
                                          was basically due to the country’s economic prosperity and its growing international
                                          importance as a place to do business. Hence, QE3 is likely to have even less impact
                                          than its predecessors.

                                          The Singapore residential market is in a good and healthy state, and it is enjoying
                                          strong demand driven by local buyers. Even so, prices are already at record levels,
                                          and local buyers are growing increasingly resistant to any further upside. The
                                          government has been releasing ample amounts of land for residential development,
                                          and potential homebuyers are aware that more than 50,000 new homes are
                                          scheduled for completion between 2013 and 2015 (13,326 in 2013, 17,833 in 2014
                                          and 19,239 in 2015). That represents an 18.5% increase on the private housing stock
                                          of 273,050 (as of 2Q 2012) over the next three years.

                                          In addition, the Singapore government’s five rounds of cooling measures have
                                          removed the speculative element from current purchases, and it will not hesitate to
                                          introduce more to make certain it does not re-emerge as a result of QE3.

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ASIA | QE3 : Implications for Hong Kong and Singapore’s Property Markets


                                                         Hong Kong
                                                         Local real estate prices are expected to edge up, given the potential increase in
                                                         market liquidity and the expected appreciation in the value of Hong Kong dollar-
                                                         denominated assets. However, the potential upside is likely to be limited to about
                                                         5-10%, even though the market saw 37% and 15% increases during QE1 and QE2,
                                                         respectively. Yet, real estate rentals and capital values may increase, due to a revival
                                                         of inflation caused by rises in the prices of a range of commodities, including steel
                                                         and cement.

                                                         Implementation of QE3 will therefore probably drive up Hong Kong’s real estate
                                                         prices, thus adding to the risk of an asset bubble. But local banks have been very
                                                         prudent and selective about issuing mortgage loans. The currently low LTVs reflect
                                                         their caution and soundness. Recent measures to lower LTVs could also help to cool
                                                         down market sentiment, as end-users who lack sufficient equity may be forced to
                                                         stay on the sidelines. Even so, these measures cannot prevent corporate investors
                                                         with strong balance sheets or cash buyers from entering into the market.

                                                         Given that Singapore’s residential market has not been vulnerable to previous QEs,
authorS:                                                 the likelihood of an asset bubble there is remote. A very sizeable residential supply
                                                         will come on-stream in the next few years. Buyer resistance to prices that are
Simon Lo                                                 already at record levels is increasing, and the government is likely to implement
Executive Director
Research & Advisory | Asia                               more measures if the market shows any untoward reaction to QE3. These factors
                                                         should maintain some degree of stability and sustainability in Singapore’s residential
email    simon.lo@colliers.com                           market over the next 12 months.
tel      +852 2822 0511

Chia Siew Chuin
Research & Advisory | Singapore

email    siew-chuin.chia@colliers.com
tel      +65 6223 2323

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