QE3 : Implications for Hong Kong and Singapore's Property Markets
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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.
www.colliers.com | RESEARCH | p. 1
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
september 2012 www.colliers.com | RESEARCH | p. 2ASIA | 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
september 2012 www.colliers.com | RESEARCH | p. 3ASIA | 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
september 2012 www.colliers.com | RESEARCH | p. 4ASIA | 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
foodstuffs).
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)
14.0%
12.0%
10.0%
8.0%
% change year-on-year
6.0%
4.0%
2.0%
0.0%
Jan-11
Jan-12
Jan-09
Jan-10
Jan-05
Jan-06
Jan-07
Jan-08
Jan-03
Jan-04
Jan-00
Jan-01
Jan-02
Jul-12
Jul-10
Jul-11
Jul-08
Jul-09
Jul-06
Jul-07
Jul-03
Jul-04
Jul-05
Jul-00
Jul-01
Jul-02
-2.0%
-4.0%
-6.0%
-8.0%
Hong Kong Singapore China
Source: Census & Statistics Department of HKSAR Government; Statistics Bureau of China; www.singstat.gov.sg/
september 2012 www.colliers.com | RESEARCH | p. 5ASIA | 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.
september 2012 www.colliers.com | RESEARCH | p. 6ASIA | 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.
september 2012 www.colliers.com | RESEARCH | p. 7ASIA | QE3 : Implications for Hong Kong and Singapore’s Property Markets
Conclusion
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.
Singapore
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
Director
Research & Advisory | Singapore
email siew-chuin.chia@colliers.com
tel +65 6223 2323
Copyright © 2012 Colliers International. Footnotes:
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The information contained herein has been obtained
from sources deemed reliable. While every Quantitative Easing 2 (QE2) - From November 2010 to June 2011
reasonable effort has been made to ensure its • November 3, 2010 - the Federal Reserve announced a second round of QE (QE2) that involved buying US$600 billion worth of longer-
accuracy, we cannot guarantee it. No responsibility dated treasuries at a rate of US$75 billion per month. QE2 was completed in late June 2011.
is assumed for any inaccuracies. Readers are
encouraged to consult their professional advisors Quantitative Easing 3 (QE3) - From September 2012 to ?
prior to acting on any of the material contained in • September 13, 2012 - a third round of QE (QE3) was announced. The Federal Reserve plans to purchase US$40 billion worth of MBS
this report. every month. In addition, the FOMC has announced it will probably maintain the federal fund rate at nearly zero until at least 2015.
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