How do stock market losses affect property?

Recent declines in the Singapore stock market could signal a further property price correction in the coming months, according to JLL.

This comes as stock market movement typically leads property market movement by one to two quarters.

“Looking back into the past, the residential market for example, corrected by four to six percent a quarter in some instances. Should the market lose footing, it is not impossible to expect a recessionary correction of this magnitude,” said Dr Chua Yang Liang, JLL’s Research Head for South East Asia.

“If this scenario pans out and threatens the stability of the property market and wider economy, it may prompt the government to re-visit its property cooling measures and other macro-economic policies including economic stimulus packages.”

The sharp correction in the stock market was triggered primarily by the slowdown in the Chinese economy, said JLL. Should the economic conditions in China deteriorate further, a more severe correction in the Singapore property market cannot be ruled out.

In fact, the Asian Financial Crisis (AFC) in 1998 clearly illustrated the disruptive effects of a stock market crash on the property market, although the economic reasons for the crash were different, the report noted.

In 1998, the currency and financial crisis in Thailand resulted in an Asian currency meltdown, which also affected the city-state.

“Stock market losses, sharply rising interest rates and a severe credit crunch arising from its proximity to the epicentre of the crisis, and rising unemployment drove Singapore property prices lower by between 35 percent and 44 percent during the crisis, after the property bubble burst across Asia in 1998,” said JLL.

Moving forward, the consultancy expects stock market volatility to persist in 2016.

“The lack of clarity and transparency over the policy road map ahead to manage the slowdown in China will increase downside risk in the stock market.

“Considering that current debt levels in several Asian countries, including China, Malaysia, Thailand and South Korea, are higher than they were before the AFC, these economies are more vulnerable to a global economic slowdown,” added the report.

As for Singapore, downside risks in the local economy “from external shocks, leading to higher unemployment levels, a weaker Singapore dollar and rising domestic interest rates, similar to the AFC conditions, could lead to a sharper than desirable price correction in the property market.”

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