EXCESS LIQUIDITY : IMPACT ON PRICE DYNAMICS OF THE PRIVATE HOUSING SECTOR IN SINGAPORE

Abstract

This paper attempts to quantify excessive liquidity in Singapore and incorporates the measure as a variable into VAR models to explore the impact of excessive liquidity on price dynamics of Singapore’s private residential properties between 1992Q1 to 2001Q4. The VAR model firstly revealed that excess liquidity indeed does seem to positively granger-cause property prices. The effect is robust after the inclusion of additional demand and supply factors into the VAR model. Preliminary findings also show that excessive liquidity in Singapore seem to be derived from “hot” money flows, showing alternating signs suggesting the quick reversal flow of funds into and out of the money market. The expansion of the VAR model with the inclusion of eight dependent variables shows that all other variables are able to explain house prices better than explaining each other. The variance decomposition test employed on the expanded VAR model shows that excess liquidity seems to have significant impact on house prices, especially in the long run dynamics where excess liquidity accounted for 28 per cent of the total variation in house prices. In contrast, the other variables seem to have less impact on house prices after the inclusion of excess liquidity as one of the explanatory variable.