http://www.straitstimes.com/archive/...nding-20150112

Sliding home prices 'won't hit spending'

Experts see minimal impact if fall is gradual and job market stays strong

Published on Jan 12, 2015 1:10 AM

By Janice Heng


RISING home prices often spur higher consumer spending but experts think today's cooling property market is unlikely to hit consumption hard.

Consumer spending grew only 1.2 per cent in the third quarter of 2014, but economists and housing academics say that sliding home prices should not deter shoppers too much as long as the fall in real estate prices is gradual and the job market stays strong.

"It will not be like the United States where we saw a large drop in consumption due to a drop in home prices during the recession," said National University of Singapore (NUS) academic Sumit Agarwal.

The link between rising home prices and higher spending is well established in the economic literature, though not necessarily in Singapore itself.

Associate Professor Sing Tien Foo of the NUS real estate department noted: "The evidence shows that when households become wealthier - feel wealthier because of housing price appreciation - they would consume more of other goods."

But it is less clear if the reverse is true, he added. So even if the property market keeps heading down, consumption may not follow.

Last year, property prices fell 4 per cent in the private market and 6.1 per cent in the Housing Board resale market.

National Development Minister Khaw Boon Wan said last month that he hopes for a single-digit price fall this year as well.

Housing experts predict prices will fall by 4 per cent to 8 per cent this year. Such a gradual fall is unlikely to have a big impact, said economists.

A rough estimate is that a 10 per cent fall in home prices might cause a 2 per cent to 3 per cent fall in consumption, according to Professor Agarwal, the Low Tuck Kwong Professor in economics, finance and real estate.

This would most likely have little effect on GDP, he added.

Bank of America Merrill Lynch economist Chua Hak Bin estimates that a 10 per cent fall in home prices will reduce spending by about 0.2 percentage point.

Owners of multiple properties are more likely to be affected as they have to service mortgages while rental income falls, said Barclays economist Leong Wai Ho, who does not expect home owners to spend less as long as the job market stays stable.

OCBC economist Selena Ling also finds the job market more significant: "The overriding factor is probably still the very healthy domestic labour market with a historically low resident unemployment rate and real wage growth."

Falling home prices might cause households to rein in their spending on non-essentials, but not for daily necessities, she said.

Things could be different if home prices fall by more than the expected single digit, or interest rates rise significantly, added Ms Ling.

"Then there could be a greater impact on consumer spending, especially if borrowers need to top up mortgage instalments with cash or face negative equity."

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