In recent times, despite the upheaval around the world, the Singapore property market has been holding well. It is still on an upward trajectory that makes it like “Not being in the game is a fool’s play”.
It has been one of the surefire ways to build your golden nest by upgrading from your first BTO HDB to a private property and to another private property every 4-5 years to escape the Sellers Stamp Duty. Not many have not reaped returns using this foolproof path.
Is a property crisis likely under such a blue-sky scenario?
There is an interesting TikTok video where the content creator was mentioning that his property agent is pitching a newly launched condo as a sure-proof way to lock in profits after 5 years of holding. It is along the line of just buying the property at 1.5 million now and cashing out at 2 million 5 years later.
Then it shows the speech by our deputy Prime Minister who said no one he has known could have predicted property prices in the future. Moreover, this development is situated in a non-prime area which makes the pitch less convincing.
Property Price Trend
Source: Trading Economics- Singapore’s Residential Property Price
From the chart above, you can see property prices have been a worthwhile holding if you have a time frame of 10 years or more. The two notable periods where there was a profound correction would be the Asian Financial Crisis in 1997 and the Global Financial Crisis in 2008.
During the Asian Financial Crisis, prices plunged close to 40% and it took nearly a decade for those who got at the peak to be back to breakeven in 2007. The stock market declined by 60% during this period. We can affirm this as a friend who bought a condo unit at the peak of 1997 saw his property valuation come back to breakeven only ten years later. It is his version of the “Lost Decade”.
Also, the massive drop could be because there was no policy restriction as a person could rack up to 5 properties fully leveraged. So when crunch time comes, it is sold at all costs leading to fire bargains, this would definitely exacerbate a deepening negative price trend.
As for the Global Financial Crisis in 2008, property prices dropped by 25% whereas the stock market declined by 40% during this period.
Are Singapore Property Prices in a Bubble?
Source: Central Provident Fund Singapore
One of the measures to determine housing affordability would be the home price to annual median household income ratio. As a rule of thumb, an affordable ratio would be below 3 but 5 is generally acceptable. Singapore’s median income based on a labour force report is S$4680 in 2021.
Source: Demographia International Housing Affordability 2022 Survey
Source: Statista
Based on the overall statistics, Singapore’s price-to-annual household Income Ratio of 5.8 is deemed severely unaffordable but looks relatively favourable when compared to other countries, especially Hong Kong at 23.2. It makes home ownership in Hong Kong almost unattainable and affordable public housing is not available to most.
Nonetheless, Singapore’s Price to Income Ratio has crept up over the years where it was at 4.8 in 2016.
Source: Business Times
Despite a headline figure of 5.8, if we look in-depth, the situation could be less positive in the private market. Singapore’s government have come up with a great public housing system where more than 80% of citizens are living in public housing that is kept relatively affordable. As you can see from the chart above, the ratio for HDB is just 3.9 in 2020 but it has moved up to around 4.8 in 2022.
However, if we just look at the private property market, the price-to-income ratio is at an elevated average rate of 14.1 which is comparable to the most expensive property markets in the world.
However, the ratio could be lower if we look at the target segment who can afford private properties. They should be easily in the 75th percentile of Singapore’s workforce and hence the median income would be higher. So taking a median income of the whole population might not be a fair gauge of affordability.
Our thoughts are even if we factor in the change in the median income based on the target segment, the price-to-income ratio should still be way above the published figure of 5.8 for the whole population.
Is a Property Crisis on its Way?
Despite the numerous measures by Singapore’s government to cool the property market over the years, prices have been on a good upward momentum. We reckon is due to the Singaporean mindset that property investment would be a safe way to accumulate wealth and it has been smooth sailing for almost 2 decades.
Come what may. Be it the Global Financial Crisis, European crisis, Covid 19 and etc, the property market always recovered and set new highs. So these are hard facts to support the notion of sticking to this approach.
However, when things look like a sure thing, it is wise to further evaluate the potential blind spots that could pivot the long-standing thesis. We have looked at recent developments that could possibly change the property investment arena in the near to mid-term.
Halt in Money Printing Press
In the past 2 decades, whenever there is a slight hint of crisis, the Federal Reserve would just do quantitative easing and flood the economy with an abundance of liquidity to get themselves out of trouble. With cheap and excess liquidity, it has flowed to the equity markets and also lend support to the property market.
The era of cheap money might be a thing of the past as unlike previously, inflation fears are for real, US latest inflation figures are hitting 8.5%. So in order to fight inflation, they have to stop those easy money-printing days.Â
Domino Effect (Home Prices are Dropping in Other Nations)
We are seeing cracks in the property markets across the world. According to The Economist, home prices are falling across the globe. Canada and Sweden are down 8% from February, New Zealand has fallen by more than 12% since their peak last year. Prices are starting to slide in US and Britain too.
Will Singapore be the last man standing and holding on to the fort?
Interest Rates Rising
Without a doubt, one of the key policies to fight inflation would be to raise interest rates. From Singapore’s aspect, we are now having to get used to fixed rates of 3.5% where just less than a year ago, it is still comfortably below 2%.Â
If inflation is not tamed, there is a high likelihood that interest rates have more upside to go. The US target inflation rate is 2% and even if they adjust it to 4%, there is still some distance from the current 8.5%.
A Fed pivot or halt in the rise of interest rate could only likely materialise when inflation is below 5%.
Job Loss Fears
With a tight liquidity situation, the previous excesses are going to be trimmed mercilessly. We could see the effect with the big tech companies like Meta, Alphabet and Sea cutting headcount. The good times of financing concept companies with no path to profitability in sight would likely be a thing of the past. Cathie Woods comes to mind.
There could be a possibility of job loss in high-paying jobs as the situation unfold. This will greatly affect the ability to finance an increasing mortgage based on the rising interest rate.
So instead of a dual-income family household, it could be down to a single income. The scenario of moving back to the parent’s place would be very real in order to survive the dire financial situation. On the positive side, rental rates have been moving up in tandem with the inflation pressure.
How would this Pan Out?
Factoring in all the dynamics of the current situation, it is interesting to see how things will pan out.
Looking at our crystal ball, we would put on our forecaster hat and visualise a likely scenario.
Though in an inflationary world, property assets should hold their value given that they are a great inflation hedge. However, we have to factor in the prices being paid and given the high price-to-income ratio for private properties, there could still be a correction in prices should a mean reversion process be in progress.
Moreover, the interest rates could skyrocket further which will affect the holding power of property owners leading to fire sales.
Fortunately, Singapore’s government have come up with policies through cooling measures to ensure that property investors or owners do not overstretch themselves with limits to how much they can loan from the bank for a property. Therefore, a situation of panic selling would be avoided if job security is intact.
Based on precedents, we are of the view that if a property crisis does occur, a forecasted drop of 30% is reasonable. It is between the fall of 40% in 1997 and the fall of 25% in 2008.
Our reasons for this forecast would be that there are policies in place to prevent speculative property purchases and hence most would still have the holding power if they hold on to their jobs. Therefore, a repeat of the 1997 magnitude is unlikely.
But this correction if it happens could prolong into a U-shaped recovery as compared to the V shape one in 2008. This is due to the quantitive easing measures not being an option given the inflationary woes we are facing at present times.
Also, if a crisis unfolds, the Core Central Region properties (Prime Area) would likely see a subtle decline as compared to the Rest of the Central Area and Out of the Central Area. The recent price increase was mainly focused on the RCR and OCR areas as the gap between them and the CCR has narrowed considerably.
Summing Up
With Singapore property prices scaling new highs despite the macro outlook, it has led to us pondering if a crisis could be brewing.Â
Though Singapore’s Property Price to Income ratio of 5.8– inclusive of public housing- would put them in a relatively low figure as compared to other countries like Hong Kong which is at 23. Nonetheless, a figure above 5 would be defined as severely unaffordable.Â
Singapore’s private property market would give uneasy warning signs as it is hovering at 14.1 which is in line with the top price-to-income ratio cities in the world.
These are some possible developments that could derail the upward trajectory:
- Halt in Money Printing Press
- Domino Effect
- Interest Rate Rising
- Job Loss Fear
Therefore, if a crisis does occur, we are of the view that it is likely to affect the Rest of the Central Area and Out of the Central Area most, as compared to the Core Central Area.
Disclaimer:
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.
