Inflation fears have pushed property prices in Singapore upwards in recent years. Fuel and commodity prices are on the rise globally, and the Global financial crisis has created inflationary pressures. Supply chain snafus and tighter monetary policy have also contributed to rising prices. But are these factors causing the escalating price of residential properties? What can the private sector do to combat these pressures?
Inflationary pressures from high global fuel and commodity prices
Despite a robust economic recovery, inflation in Singapore remains elevated. Inflation in the country’s core measures rose more than three per cent in March compared to the same period last year, and is almost double the historical average. Despite the small economy, global events have put upward pressure on prices, including the recent arrival of COVID-19 vaccines and a robust global economic recovery. Meanwhile, gas and oil prices rose due to a supply crunch and recent geopolitical tensions. Pandemic-related disruptions have also added to the rise in prices.
A moderate level of inflation indicates that an economy is thriving. A thriving economy raises the demand for goods and services, which drives up prices. However, after the recession, this level of inflation is unavoidable. Inflation in Singapore topped five per cent in 2011.
Global financial crisis
The recent financial crisis has exacerbated the property price bubble in the city-state. Prices for private homes in Singapore increased the most in two years, with foreign ultra-rich investors spending S$32.9 billion on property in the first half of 2021 alone. With the global financial crisis weighing on property prices, investors are scrambling to find homes in more desirable locations, while price increases are fueling the property boom.
While the overall price of property in Singapore is rising, the price of homes in prime districts is still rising at an incredibly fast pace. Despite the downturn, prices in prime districts have become more attractive to office-bound expats and workers in essential industries. These homes are often located further out of the central business district, near major industrial estates, universities and hospitals. In May, Jenny Lin, a 26-year-old accountant, purchased a one-bedroom apartment in Orchard for S$530,000, a price which would have commanded a price tag of about $3 million in most other markets.
Monetary policy tightening
The central bank of Singapore (MAS) has tightened monetary policy for the first time in three years. The reason: mounting cost pressures. It has joined the chorus of central banks around the world dialing back their heavy stimulus during the coronavirus-induced global financial crisis. The move was in line with the central bank’s stated goal of boosting growth and inflation while avoiding a deflationary spiral.
A recent round of measures was meant to curb speculation in the residential property market. New residential loans were capped at a maximum of five years in the sixth round, while existing mortgages were subject to stricter LTV ratios. Further, the government revised additional buyer’s stamp duty, increasing interest rates for first and second residential property purchases by 7%. Although these measures curbed demand for housing in Singapore, they did not fully dampen the property market. Indeed, the property market in Singapore has been slowing in recent years. This is partly because of the government’s deliberate monetary policy, which includes the tightening of the LTV ceiling.
Impact on corporate margins
Inflation fears are affecting Singapore’s economy. As the second wave of the Covid-19 pandemic depresses demand, rising inflation is likely to be a transitory phenomenon. Companies with sustainable business models are better suited to a rising inflationary environment, as their profitability is consistent and their valuations are attractive. Inflation, on the other hand, is a long-term negative for companies that have been unable to grow their business.
One of the ways to combat rising costs is to increase profit margins. Many companies pass on the cost of increased production and labor costs to consumers via higher prices. This approach protects their profit margins without reducing sales volumes. While companies cannot increase sales prices when demand is inelastic, they can pass on the increased costs to consumers by choosing cheaper substitutes or suppliers. This strategy has become increasingly common. Inflation-driven price increases can be a boon for companies that can pass on the higher costs to consumers.