20130817 Is Ng Eng Hen’s property advice sound?

I refer to CNA’s article “Don’t sell your Toa Payoh flats: Ng Eng Hen”. CNA

Whether residents ‘have to’ sell their unit is subjective. Such an advice, if taken, will further limit the supply of centrally-located HDB units. Ng Eng Hen should be aware that he may inadvertently cause prices to rise.

Ng Eng Hen’s reason that the “prices of homes in Toa Payoh will go up….Toa Payoh is in the centre” is simplistic.

Ng has totally dismissed the correlation between property prices and interest rates. The fact that property prices have been rising is not due to an improvement in the global economy but rather a recklessness of central bankers to artificially lower interest rates. When the reverse happens, property prices will collapse.

Interest rates have shot up during the last 4 months and banks have been adjusting their rates, upwards of course. Since our long term rates mirror those of the US, let’s take a look at US 10 year bonds.
From a low of 1.6 per cent in May, its closed at 2.83 per cent on 16 August.

Since a typical mortgage is usually 30 years, we will take a look at the longer term chart.

The 10 year bond rate hit a high of 16 per cent about 30 years ago and collapsed in dramatic fashion. Bond funds have been accumulating bonds since 2007 and may exit in equally dramatic fashion, causing a collapse in bond prices and a spike in interest rates. This may already be happening.

It has also been acknowledged by Minister Khaw who said on 4 May that “because of low interest rates, this bubble is being pushed up and sustained longer than it should have. So, it will collapse in a matter of time..”.

Ng Eng Hen’s advice on property flies in the face of mounting evidence that an exit/downgrading may be actually timely. By inadvertently talking up the market, the government may need to implement a ninth property cooling measure soon.

Phillip Ang

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