I was recently working on a new project launch by Far East Organisation (FEO) in Pasir Ris. It was a mass market leasehold condominium priced at about SGD$850 per square foot on the average. Sales were brisk due to the fact that the price was rather attractive and also, FEO staff are really good sales people!
Anyway I was shocked when I heard of the financing package that the local banks were giving my client. They were offering 0% + the 3 month inter bank offer rate (which at that time was 0.2%). This rate would stay till the project was completed, which in my estimation would be another 3-4 years. Although this super low interest rate assisted me in closing my clients, I really am failing to see how the government is encouraging financial prudence and yet allowing the banks to entice clients with such low rates. Banks themselves are taking on too much risk with such a move. All this for the sake of maintaining loan volume.
Why the reason for such low interest rates?
Our Monetary Association of Singapore (MAS) uses our Singapore Exchange rate to regulate inflation. What it means is that if things get too expensive, they will raise the value of the Singapore Dollar to make our imports cheaper and our exports more expensive.
What is the problem then?
I thought about it for a while and then I realised something. The US is now embarking on an exact opposite path as Singapore. They are flooding the market with US dollars and thus the US dollar is dropping in value. If I were a developer I would not want to develop anything in the US. If I built anything, the value of my property will drop in value. If I spent USD$10 million to build a building, I am not sure the value of my building will hold. What if the US government wants to drop the value of the US dollar by another 10-20%? This would mean that my building would be worth much less over time. On the other hand, the Singapore dollar seems to always be going UP. As a developer or investor, I would want to build something in Singapore. In future when the Singapore dollar appreciates, it will add onto the profits that I will already be earning.
I build with cheaper raw materials and sell high because I sell in Singapore dollar and Singapore dollar goes up.
versus
I build with expensive raw materials and sell low because I sell in US dollar and US dollar goes down.
Thus the government is trying to lower inflation but in actual fact it is encouraging more people to demand for Singapore denominated assets because the value of the Singapore dollar is always going up.
How to solve the problem?
MAS has to understand that it cannot only use the exchange rate to fight inflation. It has to regulate the interest rates between banks. Perhaps a change in policy please. Finance minister are you listening?
Some videos to explain a little about what is happening in the US and between banks.
http://video.cnbc.com/gallery/?video=3000026496
Yours Sincerely,
Daryl Lum
(+65) 9009 8731
visit my website @ www.DarylLum.com
read my blog @ www.DarylLum.blogspot.com
