Macroeconomic Drivers of Singapore Private Residential Prices: A Markov-Switching Approach

This paper attempts to address the relationship between various macroeconomic variables affecting Singapore private residential prices using a Markov-Switching approach rather than a single state linear regression framework. We adopt the 3-regime approach used by Nneji et al. (2013). The dataset encompasses a period from 1978Q1 to 2012Q1. Based on the extant literature, various macroeconomic variables that affect house prices were chosen. They are inflation rates, exchange rate changes, real interest rate changes, population growth, changes in public housing supply, and growth in real disposable income. The results indicate that in the steady and boom state, inflation rates, population growth, disposable income growth, and public housing supply changes are significant in explaining growth in private residential prices. Several abnormal results are also documented namely the non-significance of interest rate changes. Using a Markov-switching approach provides added information in identifying significant variables in each state allowing government policymakers to be more specific in using proper policy measures when addressing private residential price growth.