ENG-1981 — Page 70

FINANCIAL SYSTEM AND ECONOMY

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only 2.3 per cent. Nonetheless, when compared with the 12 months ending September 1980, during which virtually no increase was recorded, there was some improvement. Given that domestic exports in 1981 have not been buoyant, even such limited improvement can be considered encouraging.

The rate of increase in nominal construction wage rates was slow. This together with fairly stable prices of such building materials as cement and steel bars, the increase in building and construction (including civil engineering) cost in 1981 was moderate. The trend of decline in labour productivity in the past three years (1978 to 1980) appeared to have ceased in 1981, but the recovery, if any, was probably very mild.

Property Market

Closely related to the building and construction sector is the property market. In 1981, the previous imbalance between the demand for and supply of property, which exerted upward pressure on property prices and rentals generally, eased significantly. This was the result of rapidly increasing supply and of demand being curtailed by high interest rates and prices, and apparently less buoyant economic prospects. In terms of total usable floor area of buildings completed, there were substantial increases in the supply of all types of property. This was most marked in the case of commercial (offices and shops) property. Property prices and rentals in general either levelled off or declined during the course of 1981.

The residential property market was fairly quiet in 1981. Apart from a few large marketing exercises which were carried out in the middle of the year, there was not much activity. It seems that high mortgage rates and high flat prices have inflated monthly mortgage payments to levels beyond the reach of many aspiring home buyers. So prices generally ceased to increase further in 1981 and in some cases actually declined. Developers were more ready to offer discounts and to reduce the downpayment requirements so as to attract more buyers. There have also been signs of forced selling, with speculators having to realise their investments at a loss because high mortgage rates have made financing too expensive in relation to the current rate of increase of prices.

As regards rentals for residential property, they have probably continued to increase in 1981. Insofar as rentals for existing leases were concerned, it is difficult to make meaningful interpretations because increases in rents for practically all types of private domestic accommodation were controlled. There is little doubt, however, that rentals for new lettings, being uncontrolled, have continued to increase during the year. This is because, despite the sales market for residential property being relatively inactive, the underlying demand for domestic accommodation remained strong.

On commercial property, previous rapid increases in prices had successfully stimulated a substantial response in terms of supply, hence leading to a reasonable balance between supply and demand being achieved in 1981. The rates of increase in the purchase prices and rentals for shops and offices other than those in prime locations generally slowed down sharply in 1981 and in many cases, prices and rentals actually declined. For offices in prime locations where new supply was limited and demand continued to be strong, rentals were more stable. As regards industrial property, supply continued to be abundant in 1981, with prices and rentals either levelling off or declining slightly.

Inflation

In 1981, the two measures of inflation showed significantly different rates of increase. The Consumer Price Index (A) showed an increase of 15 per cent while the G.D.P. deflator showed an increase of 11 per cent. Although it is difficult, under a floating exchange rate