What is the effect of money supply and money velocity on Home loan interest in singapore

Will the ample supply of money in the Singapore Sibor market cause mortgage rates to rise?

The question on everyone’s mind is, will mortgage rate continue to stay low in Singapore?

Is Singapore’s pre-emptive strike on inflation in property asset the right move given the debt crisis in Europe?

What are the key issues caused by inflation?

MV = PQ = (by Irving Fisher, 1911)

Where

• M is the money supply. It can be M1, M2 or M3.
• V is the number of times per year each dollar is spent (Velocity of money)
• P is price of all goods and services sold during the year.
• Q is the quantity of Assets, goods and services sold during the year.

NOW, let us put this theory to real life application in Singapore mortgage rate market.

When Money increases where V and Q stays constant, then P increase. The rate of increase in price is inflation.

Right now, we are seeing M2 or M3 increasing faster than GDP in many nations, while prices are fairly stable (A bit on the high side) at +5.4% (in 2011) in Singapore and production (Quantity) is rather stable, this means that V, the velocity of money has yet to pick up. In other words, people are not yet spending.

Once Velocity of money V picks up, in order to control price rise, Quantity will have to pick up dramatically as well. Not all quantity can be ramped up quickly enough.

M2 or M3 increase x V = P x Q

So by taking out Foreign M2, M3 as well as M2 in Singapore attributed to foreign ownership by imposing a 10% Additional buyer stamp duty, Singapore has effectively reduced the M2, M3 money supply from the property market.

Is this too tough on a market that has already dramatically slowed? Should this NOT be applied to HDB public residential segment by restricting PR from purchase of HDBs instead? Why restrict the Private property market?

USA M2 Money Supply

 

(Source: Wikipedia)

European M2 Money Supply

 

Australian M2 Money Supply

 

Singapore’s M2 Money Supply

S$ MILLION
END OF PERIOD M2
2010
Nov 401,429.3
Dec 403,078.2
2011
Jan 406,246.8
Feb 406,280.0
Mar 413,255.5
Apr 422,475.6
May 422,716.1
Jun 423,516.7
Jul 431,311.5
Aug 431,253.4
Sep 434,818.4
Oct 439,817.4
Nov P 442,144.4

AS you can see, M2 from Dec 2010 up till Nov 2011, has grown by 10%, this exceeds the GPD growth figures.

With ample funds from local as well as foreign sources, Singapore’s mortgage interest rates can stay low. If the europe crisis continues, money will not easily find investment destinations, unless there is government leadership to re-start the economy. If not, interest rates will continue to stay low.

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