US Bank Morgan Stanley recently claimed home prices in Singapore could rise 10 per cent, by the end of 2018. That raises some eyebrows, given that it would mean a near-return to the 2013 peak (prices have fallen by around 11 per cent from the last peak in 2013). Could it really get that high?
There are clear signs of recovery in Singapore’s property market
Home prices in Singapore have risen for the second consecutive quarter, in a clear rebound: data from the Urban Redevelopment Authority (URA) shows private, non-landed residential home prices rose 0.7 per cent in Q4 2017, following a previous 0.7 per cent gain in Q3.
These gains come on the back of four straight years of declining prices.
In addition, property prices rose by around one per cent across the board, for the whole of 2017. In the previous year, prices had overall declined by 3.1 per cent.
In terms of sales volumes, developers had their best year since the property peak of 2013, with 10,245 units sold last November. In our previous article last year, we mentioned that the rising sales volumes – with somewhat stagnant prices at the time – suggested the market was at an inflection point; and indeed, the prices are now climbing to match the rising sales volumes.
The en-bloc fever is doing a lot to push prices up
The surge of en-bloc sales has two effects.
First, it’s raising the cost of land for developers. The en-bloc surge is caused by the influx of highly capitalised property developers from China, who are eager to escape their shrinking markets at home (as well as concerns of yuan devaluation, and a desire to build international brands).
Aggressive bidding from Chinese developers has seen land costs rise, with developers overall paying 29 per cent more than they did five years ago. This higher cost doesn’t just translate to smaller profits for developers; they can contribute to rising prices of new developments, as the costs are pushed to buyers.
In addition, there’s a knock-on effect: as new private properties go up in price, even older private properties tend to follow.
Second, the en-bloc sales have displaced many residents. We now have more people who have sold their properties in an en-bloc, and are hunting for new ones; typically with a lot of money in their pockets.
Thus far, there are an estimated 1,500 people who have moved out due to en-bloc sales in late 2017, and some will be looking for new houses right about now. Most have received proceeds ranging from $1.4 million to $2 million, which puts a lot of condos in their price range. As the en-bloc craze continues, and demand is ramped up by these displaced people, home prices are likely to climb.
Research by Maybank Kim Eng suggests there are as many as 30 developments, all in various stages of the en-bloc process.
The supply overhang is diminishing
Singapore’s property market faced a serious oversupply problem in 2011, when it was estimated that some 40,400 properties were unsold. This supply overhang continued to haunt developers and landlords well up till late 2017; it was often feared that the huge oversupply would lead to crashing prices (although it was mainly the cooling measures that led to that).
At present however, the number of unsold properties has fallen to just around 16,900 units. This is expected to last just around two years, perhaps less.
While this isn’t immediately contributing to rise in property prices, it does remove the worry that prices will fall from oversupply (at least, for the next two years or so).
However, a weak rental market and high stamp duties are still dissuading many investors
While home buyers seem to be diving enthusiastically into the property market, many investors are still hesitant. The rental market is at its weakest in years, and is down over 19 per cent from the peak in 2013.
This has hit the luxury market especially hard, with high vacancies in District 9 condos (many such high-end properties are bought by investors to rent out, not home owners).
One cause of this was the slump in oil and gas industries, which started to have an impact in 2014. The affluent expatriates that fuelled the high-end property market started to disappear, as companies hired locally to save cash. It’s hoped – but not guaranteed – that improvements in these industries will see the return of such expatriates.
Besides the weak rental opportunities, stamp duties remain high. The Additional Buyers Stamp Duty (ABSD) imposes a seven per cent tax on second properties for citizens, and 15 per cent tax on third and subsequent properties. For foreigners, the tax is a flat 15 per cent on all properties bought.
This continues to deter many investors, and places some downward pressure on property prices.
We are very likely to see rising prices
It’s not impossible that we’ll see a 10 per cent rise in prices, by end 2018. We’re also certain that prices will remain on a generally upward trend, barring government intervention.
Nonetheless, 10 per cent may be a little optimistic. There’s still the issue of a weak rental market to contend with, as well as rising interest rates. Singapore’s home loans are no longer as cheap as they used to be, with the American Federal Reserve raising interest rates.
There’s also the question of whether we’ll see further government intervention. The authorities have only just engineered a solution to out-of-control housing prices; they may not be eager to see them rise again so soon, and policy intervention seems likely.
It’s reasonable to expect home prices to rise; but most homeowners don’t have to worry about prices rising beyond affordability.
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