Are Singapore Properties a Good hedge Against Inflation

Singapore is consistently ranked among the top in terms of the cost of living. According to the Economist Intelligence Unit (EIU)’s Worldwide Cost of Living 2021 survey, Singapore was the second most expensive city in the world. Moreover, under the current macro environment of high inflation, Singapore’s headline inflation hit a 10-year high in April 2022 and went higher in May 2022; looking for ways to preserve the value of cash on hand has become increasingly relevant. Out of which, real estate could be a good asset class to achieve such an objective. 

Strong Correlation Between Private Real Estate Prices and Inflation

When inflation ticks upward, the value of cash gets eroded over time. While people always regard real estate investments as inflation-hedging, given the upward trend of property prices over time, it would be interesting to find out how closely property prices and inflation move hand in hand locally.

From 2010 to the first quarter of 2022, the correlation between the NUS Singapore Residential Price Index and the Consumer Price Index was 0.671, whereas the Straits Times Index (STI) only had a correlation value of 0.264. The correlation entails that the local property prices move more in synchrony with the inflation pattern compared to the stock market. If we zoom into a shorter timeframe, the correlation between NUS SRPI and CPI grew to 0.874, implying that the correlation is generally stronger in recent years.

Given the data, investing in real estate does fulfill the purpose of inflation-hedging.

Investors Can Earn Income From Rental Properties

Since the values of properties increase over time, rents would likely follow suit. Similar to the findings above, property rents also show a high correlation with CPI, with a coefficient of 0.910, showing a strong correlation between rents and inflation from 2016 to the first quarter of 2022. Therefore, using properties as an income-producing investment may have promising resilience against inflation.

Co-movements of Property Prices With Interest Rates Fluctuations

Another critical metric that goes hand in hand with inflation is the interest rate environment. Rising interest rates are often seen as a response to inflation, as it helps reduce the amount of money circulating in the economy. An increase in interest rate increases the attractiveness of risk-free investments like government bonds, given the increased return. At the same time, the cost of borrowing becomes higher such that fewer people will borrow and invest in other forms of financial products. Traditionally, people would think that interest rates have a strong negative effect on property prices since the higher cost of borrowing has a negative implication on monthly mortgage payments for prospective homebuyers.

As shown by the data from 2016 to 2022, the Singapore Property Price Index has a moderate-to-weak correlation of -0.375 against interest rates. The findings agree with the perception that property price movements are negatively correlated with inflations. However, the degree of correlation is not as strong as people anticipated. Based on the correlation, property prices might not be very vulnerable to a rising interest rate environment.

Conclusion

To conclude, the findings in this blog agree with the general perception that Singapore properties are resilient against inflation on multiple fronts. However, please be noted that correlations do not imply causation, and there might be confounding variables that the research failed to capture.

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