Singapore Property Market: Quick Recovery on the Cards?

The government has imposed a series of macro-prudential measures since 2009 to cool the housing market, taking aim at foreign demand and speculation, as property prices have risen close to 60% after the global financial crisis as confidence returned to the market. These measures, which include the implementation of higher transaction costs (e.g. Additional Buyers’ Stamp Duty) and the introduction of the Total Debt Servicing Ratio (TDSR) framework, have helped to rein in investment demand for residential properties from both foreign and local buyers. Coupled with a slowing rental market and mounting supplies of residential properties, the Singapore property market remains muted. Here’s the million-dollar question – will we be seeing a quick recovery anytime soon?

Residential Property Market Continues To Soften

Despite a pick-up in the volume of HDB resale transactions by 20.4% year-on-year in 2Q 2015, HDB resale prices continued its decline for the seventh consecutive month by -4.6% year-on-year (Chart 1). The fall in resale prices, however, was slower than the -5.5% year-on-year drop seen in the previous month and was the lowest since 2Q 2014, raising hopes for a bottoming out of resale prices. Resale prices for 3-room, 4-room and 5-room flats fell -6.1%, -4.8% and -2.6% year-on-year respectively, while resales prices for executive flats bucked the trend to rise 1.4% year-on-year, according to property data compiled by the Singapore Real Estate Exchange. A total of 5,286 homes changed hands, with 4-room flats seeing the highest number of 2,120 resale transactions, representing 40.1% of total resale volume. There was also a substantial increase in the transaction volumes for 4-room, 5-room and executive flats by 27.0%, 32.5% and 30.3% year-on-year respectively.

The HDB rental market also saw an increase in the number of applications approved for subletting of HDB flats by 24.3% year-on-year, but rentals were down -1.8% year-on-year (Chart 2). HDB 3-room, 4-room and 5-room flats posted a -3.3%, -2.2% and -2.1% year-on-year decline in rents respectively, while executive flats saw a slight 0.3% increase in rents. 3-room and 4-room flats made up the bulk of total rental volume in 2Q 2015 at 33.9% and 33.0% respectively. Leasing deals in the public housing market also saw upticks across all flat types, most notably from 4-room flats, which saw rental volumes increase by 794, representing a 29.7% year-on-year increase.

Chart 1: HDB Resale Price and Volume

Chart 2: HDB Rentals and Volume

The narrative is similar over in the private residential property market, with prices and rents of private residential properties trending downward, declining -3.7% and -4.4% year-on-year respectively in 2Q 2015 (Chart 3). Prices of non-landed properties in prime districts, city fringes and outlying districts fell -2.7%, -4.0% and -3.3% year-on-year respectively, while prices of landed properties also came down -4.9% year-on-year. The easing of rents for non-landed properties was led by a -6.2% decline in rents in prime districts, while rents in city fringes and outlying districts also fell -3.0% and -3.5% respectively.

While there was a 54.6% increase quarter-on-quarter in the volume of private residential properties transacted, overall buying demand in the market still remains weak, as the 4,104 transacted private residential units in 2Q 2015 was still down -2.5% year-on-year, as compared to 4,211 units sold in the corresponding quarter last year. Sales of private residential properties in prime districts and outlying districts saw increases in buying volume by 42.2% and 6.2% year-on-year respectively. However, sales of private residential properties in city fringes plunged -33.9% year-on-year despite falling prices.

Chart 3: URA Property Price and Rental Index

Chart 4: Sales Volume of Private Residential Properties

Back to the million-dollar question, here are three reasons why we believe the Singapore property market will not be seeing a quick recovery anytime soon.

1. Cooling Measures Unlikely To Be Eased In The Near Term

Property investors calling for a relaxation of the property cooling measures will have to wait longer. The Monetary Authority of Singapore (MAS) has told a press conference last month that the recent price correction seen in the property market has been modest, and it would be premature to remove any of the cooling measures that are in place, dashing any hopes for a quick rebound in home valuations. Indeed, against the backdrop of a 60% surge in residential property prices, a less than -10% correction in the prices of HDB resale flats (-9.6%) and private residential properties (-6.7%) from their respective peaks in 2013 does not make a strong case for a rolling back of the property cooling measures. The most pressing question on every investor’s mind is: when will these measures be eased? While not even the most skilful of property gurus can predict the future, we can get some clues from previous property market corrections in Singapore. The Asian Financial Crisis in 1997 saw property prices in Singapore plummet more than -40% which saw the government intervene with a slew of measures to boost the property market. Restrictions to property purchases were also relaxed during the dotcom bubble when property prices also corrected sharply by -16%. Hence, we expect the property cooling measures to be around until we see a further 10 – 20% price correction.

2. Interest Rates

The key 3-month Singapore interbank offered rate (SIBOR), which is used to set interest rates on mortgages, fell almost 20% from the year’s high of 1.027% in April to 0.821% in June. This is likely to be a brief respite as the 3-month SIBOR is expected to go up with the US Federal Reserve likely to hike interest rates by the end of this year. The floundering of the Malaysian ringgit and the Indonesian rupiah, coupled with China’s unexpected move to devalue its yuan, has also led to a softer Singapore dollar, putting further upward pressure on local interest rates as investors seek higher yields for holding the weakening Singapore dollar. The current 3-month SIBOR is at 0.939% (as of 17 August 2015), and is expected to rise to 1.25% by year end in the latest quarterly survey of professional forecasters released by the MAS. Interest rates have traditionally shown an inverse relationship with property prices (Chart 5). With higher mortgage payments on the horizon, the demand for property will be dampened, which in turn puts downward pressure on property prices in the short-term. The attractiveness of property as an asset class to landlords will also decrease as higher mortgage payments will lead to lower net cash flow generated from rental income. An in-depth analysis of Singapore property yields will be done in the next part of this series.

Chart 5: Relationship between Interest Rates and Property Prices

3. Pipeline of Properties

The vacancy rate for private residential properties climbed 0.7 percentage points to 7.9% in 2Q 2015, the highest since 4Q 2005, based on data released by Urban Redevelopment Authority. The high vacancy rate may be an indication of housing supply coming on stream faster than demand. In 2014, the total number of residential properties taken up stood at 31,743. With an expected 126,710 units of residential properties flooding the market over the next 3 years (Chart 6), demand will have to increase by 15% year-on-year in order to soak up the housing supply by 2018. Despite an uptick in the demand of residential properties from the previous quarter in 2Q 2015, the current rolling 12-month sales volume of just over 31,000 units means that a year-on-year increase in housing demand by 15% seems far-fetched at this juncture, given that interest rates are expected to rise and cooling measures are unlikely to be eased anytime soon. An oversupply of residential properties will ultimately impose greater pressure on prices and rents.

Chart 6: Supply of New Residential Units by Year of Completion

Bottom Line

While the property market is expected to remain lacklustre due to an absence of policy catalysts, rising interest rates and a large incoming supply of residential properties, home ownership must not be confused with property investment. After all, every family needs a roof over their heads. As for the case of property investment, at this juncture, we believe that there are other investment alternatives, which will be further elaborated in the next part of this series, that provide greater bang for your buck. Investors who rush in to the property market may end up burning their fingers should there be a prolonged downward trend in property prices and rents. Patience is key – investors may have to wait for a few more years before the property market recovers, but it is much better than speculating in the property market now only to see their life savings diminish.

Source: theindependent/fundsupermarket

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