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Property price drop will only have a small impact on GDP growth: Nomura

Tuesday, October 27, 2015 - 05:50
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The impact of a fall in property prices is also relatively short-lived, showing up with a three to four-quarter lag before dissipating quickly within six quarters, says Nomura.

Singapore

A CONTINUED softening in Singapore property prices would only have a relatively small impact on GDP growth, said Nomura in a report published on Friday.

"More formally, a 10 per cent 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 Nomura.

Nomura made its calculations through a vector auto-regression (VAR) framework, using five variables: GDP growth, PRPPI, private consumption, residential investment, and interest rates. VAR models are commonly used in housing studies in other advanced economies, the bank said.

Based on its calculations, Nomura believes that declines in property prices, in and of themselves, inflict limited damage to economic growth in the short term.

Still, other economists The Business Times spoke to disagreed that a 0.6 percentage point damage to GDP would be considered only a "relatively small impact". This is especially since going by official estimates, Singapore is expected to grow 2-2.5 per cent in 2015.

Said UOB economist Francis Tan: "Different models will yield different numbers, but my first reaction is that 0.6 percentage point sounds quite high. If it's a 0.6 percentage point drop during the last decade of economic growth where GDP expanded 5-6 per cent, it's not so bad because it's a higher base. But now that we're growing around 2 per cent, a 0.6 percentage point subtraction would be very large; as a percentage it's much higher."

Mizuho economist Vishnu Varathan agreed, calling the 0.6 percentage point figure "quite sensational" given the current economic outlook. "But it also depends on how one defines the time horizon, and one's assumptions about growth and the property market," said Mr Varathan.

Indeed, in its report, Nomura noted that declines in property prices could become more significant in the current context of an increasingly fragile economic outlook, high domestic debt, and slowing potential GDP growth.

Said Nomura: "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."

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