NEAR the peak of the property cycle in 2013, I recall walking into a showroom one Saturday morning to be greeted by an agent who excitedly proclaimed that purchasing a unit was just like buying vegetables. With property prices trending in only one direction – up – one shouldn’t think too much. The bustle around me, reminiscent of a wet market, only added emphasis to her words.
Fast forward to the present, where private property prices have declined for 14 consecutive quarters. Unlit windows form the dark mosaics of new developments, political gyrations are putting markets on edge, and the Fed is approaching its task of interest rate normalisation steadfastly, after a long period of stasis. Instead of exuberance, caution is the prevailing sentiment of the day. Amid the swings in market sentiments, it is important to keep a close watch on fundamentals. While Singapore’s property market has lost its lustre in recent years, the winds in the sails are shifting. If fundamentals are anything to go by, home prices are set to bottom next year and head for a recovery.
There are 3 key reasons behind this conviction.
First, physical oversupply is ending. Singapore’s property market entered a situation of physical oversupply in late 2013. Over 2014 to 2016, new units coming onto the market rose to around 50,000 per year, double the size of household formation. Accordingly, vacancy rates climbed three percentage points from 5 per cent at the end of 2012 to 8 per cent at end-2016. The situation is now changing. With developers moderating planned supply amid soft market conditions, the number of units coming on-stream over the next three years is set to fall. At the same time, household formation will continue at a steady pace, based on population projections from the government’s White Paper. Oversupply in the property market will come to an end by 2018, with vacancy rates edging down.
Second, macroprudential policies have entered into an easing cycle. Since February 2010, Singapore policymakers have implemented seven rounds of property cooling measures, utilising a broad mix of credit-based and fiscal measures. Taken together, they were extremely effective in curbing speculative demand and price pressures in the property market. Yet, the government’s intervention is not one-sided. Policymakers in Singapore have a strong track record of actively reviewing property legislation, and history shows that an excessive correction in prices is as zealously guarded against as a housing bubble. During 1997, 2001 and 2008, policymakers implemented loosening measures after property price declines ranging from 8 per cent to 16 per cent. Today, with private property prices already declining by close to 12 per cent from its peak, we have entered an easing cycle in macroprudential policies. In March this year, the government made modest revisions to the seller stamp duty and total debt servicing ratio. These calibrated adjustments were not meant to have a significant impact on the property market, but sent a clear signal that the government stands ready to support the housing market where necessary.
Finally, the Fed’s monetary policy normalisation won’t have as big an impact on Singapore’s property market as feared. The almost decade-long period of ultra-low interest rates since the 2008 financial crisis was a key driver of the robust recovery in the housing market. With the US economy charting a firm recovery, the Federal Reserve has embarked on a tightening cycle. Members expect the Fed funds rate to rise to 3 per cent by 2019, from one per cent currently. Given Singapore’s choice of the exchange rate as its monetary policy instrument, domestic interest rates such as Sibor and SOR will rise in lock-step. With higher rates ahead, demand from home buyers will be negatively impacted. But how big will the impact be, really? Assuming the Sibor rises by 200 basis points to 3 per cent, monthly mortgage payments for an owner of a second home worth S$1 million will rise from about S$1,750 to S$2,300 per month, under a 50 per cent loan-to-valuation ratio and 30-year loan tenure. This is a step-up, but one unlikely to lead to an intense bout of distressed sales across the board.
In hindsight, it is clear that those who bought into the cheery consensus at the showroom that Saturday morning paid a high price for their purchase. Thankfully, I managed to walk away. Today, however, we are in an inverse situation. As ice hockey great Wayne Gretzky once explained, “I skate to where the puck is going to be, not where it has been”. This is timely advice for property investors, and those who act boldly amid the widespread reticence this year may just end up swooping more than a few bargains.