DEVELOPMENT OF SENTIMENT INDEX IN SINGAPORE RESIDENTIAL REAL ESTATE MARKET AND ITS EFFECT ON THE PROPERTY PRICES

Abstract

This paper discusses the methodology in the construction of a Sentiment Index for the Singapore private residential property market. Employing proxies based on observable market variables, such as foreign capital flows, transaction volume and activities in new launches, we measure the quarterly sentiment of the Singapore market from 1995 to 2011. We further examine the effect of sentiment on the property prices as measured by the URA private residential price index. Our analysis shows that sentiment significantly influences the property price in the long run while the short run effect is inconclusive. Our study shows that investors who buy a residential property when Sentiment Index value is larger than 0.47, (a ‘Very Optimistic Market’), their returns – excluding rents – would be negative in the long run. While investors who purchase residential units when the Sentiment Index value is less than -0.47, (a ‘Very Pessimistic Market’), the subsequent long run return is more than 5% annually. Excluding rent, the average annualized return of the Singapore private residential market in the sample period is 2.3%.