Property Prices - Going Up or Down?
Even before the COVID-19 pandemic struck, there was already divided opinion towards the direction of property prices.
Many people were of the opinion that prices are due to fall.
Why not, they say? Property prices have been rising so quickly over the past few years and are at an all-time high!
This is an understandable perception based on the premise that what goes up must come down.
So, with the ongoing COVID-19 pandemic crisis and economic recession a certainty, will this ‘fall’ or ‘crash’ finally happen?
Because every country’s property market is different, for purposes of this editorial everything discussed here will refer to the property market in Singapore.
Property Prices in Singapore – What have they been like?
One of the referred to indicators of property market performance in Singapore is the Private Residential Property Price Index (PPI), compiled by URA. This index is a quarterly measure of the average private property price relative to Q1 2009 (100).
For instance, the PPI for Q2 2020 was 152.6, a 0.3% increase over Q1 2020’s 152.1 (and therefore a 52.1% increase over Q1 2009’s 100.0).
The URA Private Residential Property Price Index - since 2000 - what it looks like [Source: URA data/UppMarket Graphics]
As you can see, there were two periods when property prices went on a massive bull run: once, starting in 2006 and another time beginning in Q2 2009.
What Triggered these Bull Runs?
2006-2008 – En-bloc Frenzy
After years of a relatively subdued property market, property developers were starved of inventory and hungry to acquire land to build on. This resulted in an en-bloc frenzy that saw many estates sold to developers at record prices, triggering a run up in property prices.
The ‘run up’ in property prices soon turned into a full bull run with many en-bloc beneficiaries – loaded with cash -buying and ‘flipping’* properties. The market was in full euphoria, with properties changing hands at record pace.
Q2 2007 recorded the largest ever quarterly transaction volume and highest ever number of sub-sales.
*”Flipping” loosely refers to property buyers buying and selling off their properties within a short time, sometimes even before they even take possession of the property. Such transactions are recorded as Sub-sales.
Private property transaction volume reached a highest-ever peak in Q2 2007, reflecting a sense of market euphoria [Source: URA data/UppMarket Graphics]
2009-2011 – Post Global Financial Crisis
As the economy recovered after the shock of the 2008 Global Financial Crisis, property speculators returned to familiar ways. The growing euphoria was intensified with demand from a rapidly growing population and foreign buyers looking for “safe-haven investments” post-financial crisis in the form of Singapore property.
This triggered yet another market bull run, this time bringing the PPI even higher than the Q1 2008 peak.
…And What Stopped Both Bull Runs?
The 2006-2008 bull run met a sudden death brought about by the 2008 Global Financial Crisis. After 2 years of intense market movements, property buyers’ excitement quickly turned to panic with many offloading excess properties. The collective effect was a rapid 26.2% drop in the PPI.
The subsequent bull run which began again in 2009 was different.
This time there was no crisis to curtail property buyers’ sentiment and prices continued rising.
Concerned that a bubble may be forming, MAS then went on to introduce a whole slew of ‘Cooling Measures’ to slow prices down. Various measures were introduced in steps between late 2010 and 2013, resulting in prices leveling out to eventually reach a peak in mid-2013 before retreating gently.
A list of major "Cooling Measures" introduced by MAS reflecting their impact on the Property Price Index [Source: UppMarket Graphics]
Cooling Measures
The various cooling measures implemented by MAS can be sorted into THREE categories:
To eliminate short-term holdings (weeding out speculation)
To eliminate excessive buying (weeding out artificial demand)
To encourage buying within financial ability (weeding out financial over-commitment)
By referring to the table above, you can see the impact each of these measures had on property prices:
The introduction of Sellers’ Stamp Duties (SSD) to discourage buyers form ‘flipping’ properties did not have much impact.
The lowering of Loan-To-Value (LTV – the maximum % of the property’s value you can take a housing loan for) had some impact
The introduction of Additional Buyers’ Stamp Duties (ABSD – additional tax to pay for multiple property ownership) had some impact
While most of these measures did slow the rate of PPI increase, none of them had as severe an impact as the introduction of the Total Debt Servicing Ratio (TDSR) in June 2013.
Its implementation marked a real turning point for the PPI in Q3 2013, with the PPI sliding downwards thereafter.
What This Could Suggest
The way in which the PPI reacted to each of the various cooling measures suggests a few interesting things:
Property buyers were not afraid of the prospect of longer-term holding – the implementation of SSD did little to slow property prices. It was, at most, a game changer.
Property buyers seem to have deep pockets – requiring larger down payments on property purchases did not stop them from going out to transact (when LTV values were adjusted)
Property buyers have confidence in the property market – the various measures and taxes introduced generally make property purchasing a longer-term investment. Buyers were not deterred by that.
However, since TDSR rules triggered a turning point in the PPI, it does reveal a clue as to what really limits the bulk of property buyers in Singapore.
It’s All About How Much Housing Loan They Can Get
Past PPI data and how it has responded to cooling measures seems to suggest that property buyers aren’t afraid to pay more for a property.
However, it appears that limits on borrowing, via TDSR rules have made buyers unable to afford these higher prices.
TDSR basically limits your housing loan quantum based on your average monthly income (only a certain percentage can be used to pay housing loan instalments).
This means that income level is a strong factor affecting property price growth in Singapore.
PPI vs Inflation vs Wage Growth
During the latest round of property cooling measures in July 2018, MAS made clear that it believes property prices should run “in line with economic fundamentals”. This can generally be interpreted to mean that MAS does take a view towards managing property prices to track inflation.
It's various attempts to control property prices via the various "cooling measures" seem to be taking effect.
Note how the PPI looks unmistakably the same as the Consumer Price Index (CPI) – which is our measure of inflation.
Consumer Price Index versus Property Price Index (4 year moving average) - both appear to be following the same growth trend [Source: Data.sg/UppMarket Graphics]
Also, let’s again bring up the possibility that income level may be the one of the strongest factors affecting property buyers. With that, note how Real Wage Growth has slowed in recent years.
Wage growth is slowing, bonuses are shrinking [Source: Ministry of Manpower Statistics/UppMarket Graphics]
The Verdict: Up, down or stagnant?
Stagnant wage growth
Negative GDP (has fallen a record 13.2% in Q2 2020 and is expected to remain weak)
A not-so-rosy outlook for the global economy over the next few years, exacerbated by the Covid-19 crisis
I hate to be negative about things, but none of the above spells “upside” for property prices. With unemployment expected to rise and wages stagnating while the economy figures itself out, it’s hard to see property buyers going out and committing to higher property purchase prices.
That said, there are also reasons to be confident that property prices will not decline:
Past cooling measures have removed, in large part, speculative players whose transactions could otherwise have caused price instability (such as during the 2008 Global Financial Crisis)
LTV & TDSR measures mean property owners should remain financially stable
Singapore is renowned for its stable and good governance, there is little reason to lose confidence in the value of property as an asset – a sentiment shared also by foreign investors
In fact, prices have held on well throughout the first half of the year as the Covid-19 crisis came in.
Data above according to the SRX Property Index (SPI) - prices across the various property types have generally remained stable with no meaningful price swings [Source: SRX data/UppMarket Graphics]
Put simply, the given the profile of today’s property owners, the vast majority will not have any compelling reason to sell at a hurry, at a lower price. In fact, although slow, there should still be regular demand keeping the market supported.
The downside risk is therefore low and we should instead be seeing price remain stable.
Supply vs. Demand – the one concern
Perhaps one of the caveats to price stability is the possibility of an oversupply in the primary market. Numerous analysts have warned that there is a surplus of uncompleted private residential units in the pipeline.
In short: too many new launch units on the market
We will not discuss this in detail here, but you should be aware that such an oversupply could push overall property prices downwards slightly – simple economics: more supply + less demand = lower prices.
Is there a possibility Cooling Measures will be removed?
So with property prices stagnating, or “stabilizing” at last, is there a possibility the government will consider cutting back on some of the cooling measures?
Let’s look at this realistically.
Firstly, the desire to own property remains high among Singaporeans. At 90.4% (according to 2019 data), Singapore has one of the highest home ownership rates in the world. In addition, the concept of owning a second property from which to get rental income has traditionally been deeply bought into. Just ask around – how many of your friends would gladly buy a second property if they could afford it?
Secondly, Singapore does remain an attractive city for foreign investors.
With these factors all looking juicily positive for the property market, there is a real possibility of another market bull run if cooling measures are reduced since pent-up demand will rush in.."Ah finally the right time to buy!! Quickly buy, before cooling measures come back again!"
Sounds good?
Not if you’re the average Singaporean looking to buy your first property – the one you’ll purchase as your home.
And it certainly won’t be good with too many people owning 2nd properties hoping to earn rental income, only to find that the number of tenants are drying up.
Do you think the government will be keen to unwind any of their cooling measures then?
In Conclusion
The property market in Singapore has come a long way and is now reasonably stable, evidenced by the absence of any volatility during the ongoing Covid-19 crisis.
However, as has been discussed – “stability” does also suggest ‘stagnation’.
While it is unlikely that property prices will see any decline, I am of the opinion that in the years ahead investors may also find it difficult to see meaningful gains in their property values.
However, that does not mean it will not be worth purchasing property in Singapore.
· The quality and design of properties in Singapore make for very good homes – at the end of the day, not everything can be thought of in terms of monetary gains, and for that its worth putting your money in to a Singapore property as a home for your family and lifestyle
· If you can afford a second property, you can still generate gains (positive cash flow) when you rent out your property – in fact, rental returns will likely become the prevailing consideration for property as an investment (rather than future price appreciation). The key to this is SELECTING THE RIGHT PROPERTY to ensure you do indeed get a tenant in the increasingly challenging rental market.
Lastly, for those who dare to try, explore and take a chance – there definitely are hidden property picks which have huge potential to outperform others. I will share some tips on picking these “hidden gems” in my next Editorial – if you would like to have a piece of it, drop me a text!
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