Falling home prices may cut GDP growth

Source : Business Times - 11 Nov 2008

However, analysts continue to see strong demand for HDB flats
A 10-15 per cent fall in overall housing prices could shave 0.4 to 0.6 of a percentage point off annual GDP growth due to lower construction investments alone, according to Citigroup.
Using information from four previous studies, Citi analyst Kit Wei Zheng concluded that a 10-15 per cent fall in home prices means that overall construction investments - which make up 11 per cent of GDP - could fall by between 16 and 24 per cent from baseline after a period of five years, or roughly 3-5 per cent per year.
This would reduce GDP growth by about 0.4-0.6 percentage point each year.
‘This impact, while not negligible, is not regarded as a catastrophic outcome, and probably pales in magnitude to the export and manufacturing downturn,’ said Mr Kit.
Similarly, OCBC economist Selena Ling thinks a fall in private home prices - and subsequent fall in residential construction demand - will not have too large an impact on GDP. ‘There will definitely be some impact,’ she said.
‘But right now, the construction industry is driven more by commercial and industrial projects. Private residential projects make up just one part of construction demand.’
CIMB-GK economist Song Seng Wun said: ‘Some of the slack in private residential construction activity could be taken up by an increase in public sector demand.’
Private residential construction investments account for about one-fifth of total contracts awarded, and contributed around 13 percentage points to the overall 64.7 per cent growth in contracts awarded in the first three quarters of this year.
In contrast, public construction projects, including HDB projects, comprised 34 per cent of total contracts awarded and contributed 33 percentage points to growth in contracts awarded. They accounted for more than 50 per cent of overall growth.
Looking ahead, Citigroup property analyst Wendy Koh expects a further 25 per cent decline in the high-end residential segment. Prices in the mid-market could fall another 15 per cent, while the mass market could start to see a decline of 5-10 per cent.
The direct impact of falling private housing prices on private consumption spending - and therefore GDP - is also likely to be small, Citigroup said. For one, as housing assets are mostly illiquid in Singapore, wealth effects are largely absent.
Lower private home prices may in fact increase household discretionary incomes for spending on other items.
In addition, less than 20 per cent of Singapore’s population lives in private housing and therefore public house prices are probably more relevant for consumption, Mr Kit said.
‘Public residential construction demand has actually surged, given that public housing demand has remained robust so far,’ he said.
‘Nonetheless, we cannot rule out a fall in public residential construction demand going forward, if HDB prices start to plateau as well.’
Demand for HDB flats remains strong and prices are still on the uptrend. But a slowdown is expected, which could lead to lower public residential construction demand and have its own impact on GDP, analysts said.