Nomura believes that a continued decline in property prices will only have a minimal impact on Singapore’s GDP growth, reportedThe Business Times.
“More formally, a 10 percent decline in the real private residential property price index (PRPPI) growth leads to a cumulative 0.6 percentage point drop in real GDP growth. The impact is also relatively short-lived, showing up with a three to four-quarter lag before dissipating quickly within six quarters,” said the Japanese financial company.
The calculations were made by Nomura via a vector auto-regression (VAR) framework, using five variables – PRPPI, GDP growth, residential investment, interest rates and private consumption. It noted that the VAR models are commonly used in housing studies in other advanced economies.
While Nomura expects the drop in property prices to have limited impact on economic growth, some economists disagree, especially since growth of two to 2.5 percent is expected this year.
“Different models will yield different numbers, but my first reaction is that 0.6 percentage point sounds quite high,” said UOB economist Francis Tan.
“If it’s a 0.6 percentage point drop during the last decade of economic growth where GDP expanded 5-6 percent, it’s not so bad because it’s a higher base. But now that we’re growing around 2 percent, a 0.6 percentage point subtraction would be very large; as a percentage it’s much higher.”
Mizuho economist Vishnu Varathan described the 0.6 percentage point figure as “quite sensational” considering the present economic outlook.
“But it also depends on how one defines the time horizon, and one’s assumptions about growth and the property market,” said Varathan.
Nomura stated that the property price decline may become more significant within the present context of high domestic debt, slowing potential GDP growth and an increasingly fragile economic outlook.
“Indirect channels exist too. If household balance sheets deteriorate as a result of a house price correction, on top of the initial impact on consumption from negative wealth effects, consumer sentiment could weaken and banks could ration credit as the value of mortgage collateral falls,” the report added.
Romesh Navaratnarajah, Senior Editor at PropertyGuru, edited this story. To contact him about this or other stories email romesh@propertyguru.com.sg
Source: PropertyGuru (27 Oct 2015)