INFLATION-HEDGING ABILITIES OF SINGAPORE �S PRIVATE RESIDENTIAL PROPERTY

Abstract

This paper examines the inflation hedging abilities of Singapore’s private residential property. Until now, little has been done to further explore the inflation hedging of different property sub-type under residential property besides property overall being a good hedge against inflation when compared to other asset classes. Through the study, we will look at the appreciation component of property returns without including the rental component due to limited data. Another reason is that the research is for buyers who purchase properties either for own stay or investment and there may be no guarantee that the property may be leased out during the entire holding period. Hence, to provide an accurate study on inflation hedging abilities of residential property sub-type, only the price index is looked at. Ordinary least square regression analysis is used as suggested by Fama and Schwert (1977). The returns of each residential sub-type are analyzed against actual, expected and unexpected inflation. The study also looks into the effect of the cooling measures on residential property returns from fourth quarter of 2009 that were implemented by the Singapore Government to curb property speculation. The results showed that private residential properties are able to significantly hedge against inflation over the period. However, the results were inconclusive during the period of cooling measures. Most of the results also had low R-square which indicates that property returns might be driven by other factors such as interest rates and business cycles rather than inflation alone.