Falling property prices pose risk for economy

Although Singapore’s falling construction activity is negatively affecting its economy, a sharp drop in property prices could pose a greater threat, according to media reports.

The city state’s economy grew by merely 1.2 percent in Q3 2014 on an annual basis based on figures published yesterday, while most economists polled by Reuters were expecting a 1.8 percent rise.

Specifically, the quarter’s weak GDP expansion is mainly attributed to slowing construction activity, with the sector suffering dismal growth of 1.4 percent compared to 4.1 percent in Q2 2014.

However, price corrections are of greater concern said CIMB bank’s Regional Economist Seng Wun Song.

“If the pace of the global economic recovery continues to plod along rather than pick up steam, the deceleration in Singapore asset prices could be sharper than the current 10-15 percent range, which would have repercussions on equities and for the wealth effect,” he explained.

Based on Knight Frank’s data, prices in Singapore’s prime housing market dropped by 7.3 percent in H1 2014. This segment comprises five percent of the most expensive residences in the country.

Nevertheless, a sharp decline in prices is likely to be precipitated by an external trigger from the global economy, said Mizuho Bank’s Market Economist Vishnu Varathan.

“For property to compound into a big risk you would need to see a very negative spillover from China, or the unlikely case of a faster-than-expected rate hike by the U.S. Federal Reserve,” he said.

A combination of these factors could lead to domestic demand drying up and prices stumbling, he added.

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