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[SINGAPORE] Mixed results from Singapore's transition to a productivity-driven growth model, coupled with tighter population policies and housing measures, are weighing on the real estate market, said Bank of America Merrill Lynch (BOAML) in a report on Tuesday.
On the restructuring front, results have been mixed. GDP (gross domestic product) growth has averaged 3.8 per cent in the last three years versus average growth of over 7 per cent during the 2004-2008 population boom; labour productivity has struggled to compensate for weaker foreign labour growth; and labour constraints are weighing on growth and pushing core inflation higher, said BOAML economist Hak Bin Chua.
"We estimate that about 83,000 jobs have been forgone during 2011-2013 due to stricter labor policies. . . Job creation has declined to 22,000 in Q2 2014, the slowest in almost four years. We believe total job creation is likely to slow to about 100,000 this year, vs. 136,000 in 2013," he said.
The bank estimates productivity growth of one per cent, versus the government's target of 2 to 3 per cent.
"We do not see the government reversing course, but a pause may be in order. Scheduled foreign labour tightening is not over. Levies will be further raised and dependency ratio ceilings tightened next year. The intensity of such tightening will probably reach a crescendo by 2015 unless the government chooses to further tighten in the Budget . . . we think a pause in the restructuring is likely and in order, as companies, particularly SMEs, are having trouble adjusting to the speed of the tightening," said Dr Chua.
A second notable trend is the accelerated shift to a services-based economy, which will slow demand for industrial space and support demand for commercial space.
Such restructuring and stricter foreign worker and immigration policies are lowering potential growth and impacting the property market. Compounded by strict property measures, transaction volumes have fallen sharply and property prices have slid for several quarters. According to property analyst Donald Chua, home prices could fall by 20 per cent over 2014 to 2016.
Separately, while property measures have curbed household leverage, they have been less effective in curbing the overall banking system leverage. Also notable is the fact that households have increased foreign property investments and offshore financing as a result of the measures.
"Overall, Singapore household balance sheets look healthy despite easing property prices. The household asset-liability ratio remains above six times, with 53 per cent in (non-property) financial assets. Household debt has stabilized at about 76 per cent of GDP and is far below past peaks (of over 90 per cent)," noted Dr Chua.
CPF balances have also increased as more members choose to leave their funds in CPF due to the attractive interest rates rather than drawing the funds down for housing. This will help provide a buffer in the event of a sharper property market correction or rising interest rates.
Looking ahead, cyclical property measures - stamp duties and loan-to-value limits - may be relaxed when US interest rates and Singapore mortgage rates begin rising. This would put the timing of any potential relaxation in the second half of 2015.
Residential property prices would have probably declined by more than 10 per cent by the middle of 2015 and highly leveraged households would have de-geared more sufficiently. An earlier relaxation would probably require property prices to fall more sharply or the economy to slip into a recession, concluded the report.