Eugene Say, a second-year student at the SMU Lee Kong Chian School of Business and student trainer in the SMU-Citi Financial Literacy Programme for young adults, shared his thoughts on how the key to finding some comfort and peace in today's financial environment was to adopt the habit of saving, together with a view to incurring less debt. This would be possible only by reinforcing good decision-making skills when it comes to one's finances. He said that the act of saving money is the most fundamental financial discipline everyone should master, regardless of age and financial status. Mr Lee also advocated responsibility in using credit. He urged young Singaporeans to redefine wealth, happiness and success and cited a survey by OCBC Bank to show that, encouragingly, Singaporeans are shifting their focus towards intangibles defined by non-monetary values.
The Sim Kee Boon Institute for Financial Economics at SMU (SKBI) will be launching a new real estate price index in the near future. The index would take factors such as unit level and area into account, in order to better reflect the trend of local private homes. SKBI held an index research academic forum on Tuesday. SKBI Director and Professor of Economics and Finance, Yu Jun, shared that the new index would consider a variety of factors which include: purchase from developers or resale units, free-hold or 99 year-lease, unit floor and size, creating the world’s first such computation.
At a public lecture organised by SMU, Nobel Laureate Professor Thomas Sargent said that while the QE3, launched by the Federal Reserve, might trigger the risk of an economic bubble, it would not necessarily be a bad thing as this could push US property prices upwards and relieve the pressure on mortgages. Prof Sargent specialises in the fields of macroeconomics, monetary economics and time series econometrics, and his research has been instrumental in addressing recent economic crises. He also commented that while many macroeconomists tried to find a predictable and logical model covering all possibilities, it was hard for them to achieve meaningful results due to the complexity of human behaviour.
U.S. home prices are on an upswing. What does this mean for the Asian property market?
American homeowners might never forget the pain inflicted by the subprime mortgage crisis of 2007-2009, but recent economic numbers have injected a little optimism. According to the February 2013 S&P/Case-Shiller Home Prices Indices, home prices across 10 selected cities rose an average of 8.6 percent compared to February 2012. When expanded to 20 cities, the figures were even better: up 9.3 percent.
“The numbers both reflects a general recovery, and is instrumental in that general recovery,” explains Susan Wachter, Professor of Real Estate and Finance at The Wharton School of the University of Pennsylvania. “The economy is recovering slowly, not robustly, but nonetheless it is recovering, and that is the major fundamental that’s supporting the housing market along with historically low interest rates.”
Wachter adds, “But then again, the recovery is aided by the housing market price increases which brings wealth to households, puts equity back into their homes, making homes sellable. They become less ‘underwater’, brings consumer confidence back because people’s wealth is heavily related to their housing assets. So in fact, it’s this recovery in the housing market that’s driving this overall recovery.”
The use of Indices
Speaking to Perspectives@SMU on the sidelines of the SKBI Annual Conference on Financial Economics, Wachter described the importance of quality data, and how the lack thereof contributed to the subprime crisis: “In 2005, there was evidence of under-pricing of debt, that is, cost of credit for mortgages was decreasing relative to cost of other credit at a time when risk was patently growing. There were some funds who used the data to hedge, take positions that protected their funding sources which in the end protected their investors.”
“Nonetheless, there was great surprise in the end, and part of the surprise was due to the lack of information on how bad credit quality had become. If there had been information that was real-time on the decline in credit quality, then that would have been priced in, and also there might have been policymaker steps to intervene, to at least stop the trend in deteriorating credit conditions.”
Preventing a property crash in Asia
Two major factors contributed to the United States property bubble that eventually led to an eventual crash: a large inflow of foreign funds and low interest rates. Given that these are the same conditions that currently exist in much of Asia, fears of a repeat of the U.S. property market crash on the continent is well justified.
“Interest rates are extraordinarily low. They are low in part because of policy, in part because recovery has not been strong across the world,” Wachter explains. “I think the key vulnerability going forward is, ‘What happens when recovery does come about? There’s no doubt at that point that interest rates will increase, but how sharp an increase?”
“The second related concern is: many economies in Asia are exposed to the housing sector short-term interest rates. They’re exposed to adjustable-rate mortgages that are short-term. If interest rates increase sharply, this could cause mortgage payment shock to households, and that is a concern that needs to be watched out for.”
To what extent mortgagers would experience difficulty in meeting monthly payments depends on how, and if, they are over-leveraging in order to move up the property ladder. But Wachter believes the key question is the health of the banking sector as a whole.
“What is the exposure of the banking system? That is really the key question. In China, the real concern is the very rapid increase of house prices, which are far beyond increases in income. But the questions are: Is the banking sector exposed? What’s the quality of the credit? And how much of the credit of the banking system is backed by housing? My understanding is, relative to the U.S., it’s far, far less. The banking system is far less exposed to real estate and more exposed to industry generally.”
“I don’t necessarily see the same threat (in Asia) as I did in the U.S. when there was an astonishing unknown expansion and at the same time, deterioration in mortgage credit to which the banks are exposed.”
Lesson learnt?
The fear of foreclosures, sparking a full-blown banking crisis that leads to a recession, is one that haunts policymakers. However, Wachter believes the events of the past five years have taught policymakers worldwide valuable lessons.
“China has implemented several initiatives to cool off a heated housing market. Korea has done the same. Right at this moment, Switzerland and Norway have housing price increases. Much of the world has seen major housing price declines but not throughout the world. Asia, after the Asian Financial Crisis, has seen housing prices rise. They were not part of the extreme decline that occurred in the U.S., Spain, Ireland and elsewhere.”
Going forward, Wachter believes central banks in Asia are aware of the potential problems that a sharp rise in interest rates could cause, and are working to soften the impact should it happen. Even so, she advises caution. “We’ve had decades of decreasing interest rates, and we have not seen the impact of a major rise in interest rates on consumers at a time when consumers have obligations in terms of adjustable-rate mortgages. It’s likely to be a global problem when it occurs because adjustable-rate mortgages are the standard.”
Singapore consumers are expecting inflation to continue to fall amid global declines and uncertainty around the weak global economic
outlook.
This is according to the latest findings of the SKBI-MasterCard Singapore Index of Inflation Expectations (SInDEx).
On whether the buy and hold investment strategy prevails as the best strategy for investing in the stock market, Associate Dean (Specialised Masters Programmes) of the SMU Lee Kong Chian School of Business and Professor of Finance (Education) Benedict Koh noted that such a strategy is a passive one because transactions are kept to a minimum. "To reduce volatility, investors should buy and hold a diversified portfolio of stocks spread across different industries," he says. Value investors such as Benjamin Graham and his most famous disciple Warren Buffett believe strongly in such an approach. Also, on the “no risk, no gain” strategy, Prof Koh noted that long-term government bonds returned 5.24 per cent a year but had significantly lower volatility (a factor correlated to riskier assets) compared to equities. "This saying describes the trade-off relationship between expected return and risk. It is important to differentiate between expected return and realised return as the trade-off may not hold between realised return and risk for specific trading periods," he added.
[Singapore, 22 April 2013] – Singapore consumers are expecting inflation to continue to fall amid global declines and continued uncertainty around the weak global economic outlook, according to the latest findings of the SKBI-MasterCard Singapore Index of Inflation Expectations (SInDEx).
The SInDEx, which was jointly developed by Singapore Management University’s Sim Kee Boon Institute for Financial Economics (SKBI) and MasterCard, is derived from an online survey of around 400 randomly selected individuals from Singapore households.
The online survey helps researchers understand the behaviour and sentiments of decision makers in Singapore households. This is the seventh wave of the quarterly survey conducted under the collaboration since the indices were officially launched in January 2012. SInDEx was developed by Dr. Aurobindo Ghosh and Professor Jun Yu from SMU SKBI, in collaboration with MasterCard.
In the latest survey conducted in March 2013, consumers shared their views on perceived values of economic variables over the next one to five years.
Comparing the two waves of research conducted in December 2012 and March 2013, consumers expect inflation to decline in the next 12 months. Their perception of the One-year-Ahead headline inflation (CPI-All Items) recorded a significant dip from 4.37% in December to 4.12% in March. This is the lowest it has been since its inception in September 2011. At the same time, the forward looking SInDEx1, a composite weighted index of One-year-Ahead inflation expectations decreased to 4.26% (from 4.4% in December).
The long term Five-year-Ahead overall (or CPI-All Items) Inflation expectations is at 5.2%, dropping marginally from 5.21% in December, reaching the lowest level since March 2012. The Five-year-Ahead Singapore Core Inflation rate (excluding accommodation and private transportation) also decreased slightly to 4.82% from 4.84% in the December wave, following a downward trend.
The composite Five-year-Ahead Singapore Index of Inflation Expectations (SInDEx5) in March 2013 fell marginally to 4.96% from 4.97% in the survey conducted in December 2012.
Dr. Aurobindo Ghosh, co-creator of SInDEx, and Programme Director of SMU SKBI said, “The unprecedented and concerted global expansionary monetary policy and open market operations by central banks in the aftermath of the Global Financial Crisis (GFC), and record low interest rates in the G3 Economies (U.S., euro zone and more recently Japan) have not caused unhinged inflation expectations in a small open economy like Singapore, according to the SInDEx Survey. One of the possible reasons for this seems to be that imported inflation has moderated.”
“Furthermore, the survey respondents seemed to feel that local structural factors like increasing wages from a tight labor market and possibly other pass-through costs including higher COE premiums have not significantly increased the overall prices. With One-year-Ahead headline inflation expectations at its lowest level since we started collecting data for SInDEx in the third quarter of 2011, there are strong signs of anchoring of medium term inflation expectations in Singaporean households,” Dr. Ghosh added.
Dr. Yuwa Hedrick-Wong, global economic advisor, MasterCard said, “Inflation expectation remains high in spite of the slight decline in the latest survey findings. This highlights persistent worries over the global economic outlook, especially in light of the continuing euro zone crisis. While Asia continues to be the best performing region in the global economy to date, global economic conditions are still fragile and unstable, which have direct impacts on a small and open economy like Singapore.”
Methodology
Two indices were created, SInDEx1 and SInDEx5, to measure the 1-year inflation expectations and the 5-year inflation expectations. The data for the SKBI-MasterCard Survey was collected online from about 400 consumers. The sampling was done using a quota sample over gender, age and residency status to ensure representativeness of the sample. Employees in some sectors like journalism, marketing were excluded as that might have an effect on their responses to questions on consumption behaviour and expectations.
About Sim Kee Boon Institute for Financial Economics
Established in July 2008, the Sim Kee Boon Institute for Financial Economics (SKBI) at the Singapore Management University promotes the study of Financial Economics and Financial Econometrics in areas of strategic relevance to Singapore's economy and the economies of the region. A significant addition to Singapore's efforts to be a financial hub in Asia, SKBI is a leading institute for academic research with strong industry application and practical dimension in the area of Financial Economics.
The Institute has four major research centres for quantitative financial analysis and offers training programmes for professionals in the financial industry. Its work is conducted in close collaboration with leading scholars in financial economics and financial econometrics from around the world as well as leading international organisations and experts from industry. skbi.smu.edu.sg
About MasterCard
MasterCard (NYSE: MA), www.mastercard.com, is a technology company in the global payments industry. We operate the world’s fastest payments processing network, connecting consumers, financial institutions, merchants, governments and businesses in more than 210 countries and territories. MasterCard’s products and solutions make everyday commerce activities – such as shopping, traveling, running a business and managing finances – easier, more secure and more efficient for everyone. Follow us on Twitter @MasterCardNews, join the discussion on the Cashless Conversations Blog and subscribe for the latest news.
SMU Survey: 2013’s inflation expected to drop to 4.12%
Singapore consumers continue to expect inflation to edge downwards, said the latest SKBI-MasterCard Singapore Index of Inflation Expectations report – produced by the Sim Kee Boon Institute for Financial Economics at SMU (SKBI) and sponsored by MasterCard. Responses from a representative sample of 400 local consumers polled online in March produced a composite index showing that the general public expects inflation of 4.26 per cent for the year ahead, down from 4.4 per cent in December last year. Consumer expectations of headline inflation fell to 4.12 per cent – the lowest expected level since the survey's launch in September 2011 – from 4.37 per cent a quarter earlier. Core inflation, which strips out accommodation and private road transport costs, is also expected to fall to 4.32 per cent, from expectations of 4.44 per cent in December, said the report. SKBI Programme Director and co-creator of the survey, Aurobindo Ghosh said, "Given that the medium-term expectations are fairly anchored, we will not see huge fluctuations in average inflation expectations but possibly an increase due to increased uncertainty in the global financial system."
Singapore consumers expect inflation to continue to fall in the year ahead amid a persistently fragile global economic environment, according to a quarterly study by SMU and MasterCard. Programme Director of the Sim Kee Boon Institute for Financial Economics at SMU (SKBI) and co-creator of the survey, Dr Aurobindo Ghosh, said, “Survey respondents seemed to feel that local structural factors like increasing wages from a tight labour market and possibly other pass-through costs including higher COE premiums have not significantly increased the overall prices.”
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