In Q2 2016, there were hopes among sellers and developers that property prices had bottomed out. After the big price drops in Q3 2016 however, and continued sluggishness in the past month, it seems apparent that we may not have hit rock bottom yet. This is good news for home buyers, who will continue to see rising affordability. Investors, however, may find their holding power tested.
The low interest rate environment may be at an end
The American Federal Reserve (the Fed) is due to consider a rate hike between the 13th and 14th of December. Regardless of what they decide however, it’s clear that the environment of low interest rates is coming to a close.
Property loans were cheap in the aftermath of the Global Financial Crisis in 2008/9, as the Fed dropped interest rates to zero to stimulate economic recovery. This in turn impacted SIBOR and SOR rates, to which Singapore’s property loans are pegged.
Following stabilisation of the American economy (on the back of unemployment normalising at around five percent), the Fed has embarked on a process or gradually raising the interest rate again.
The Fed has planned a series of rate hikes at 0.25 percent each, with the last being in December 2015 (the next rate hike delayed in the wake of uncertainties such as Brexit, and a weak global economy).
Thus far, the typical home loan rate in Singapore (which is generally based on SIBOR) has been around 1.8 percent for the past eight years. This is much lower than the historical rate, which is around 3.7 percent. While it’s unlikely that rates will hit three percent for many years yet, there is a high chance we will see interest rates inch past two percent by the end of 2017.
This will be factored into the buying decisions of investors, who may not be able to cover the mortgage given our weak rental market (see point 3).
Investors typically want their property to be cash generating assets, and aggressive buying in the property heydays of 2012-2013 were motivated by rental income that more than covered mortgage repayments. The environment for 2016, and likely 2017, seems to be one of rising repayments (due to the rate hikes) and at the same time falling rental income.
Recent data has dashed hopes that private property prices have bottomed out
In Q2 2016, the decline in property prices seemed to slow, with luxury properties even inching up 0.3 percent. This created the impression that property prices had bottomed out, and would not go any lower.
This was dispelled by results in Q3 2016. Being the 12th straight quarter of declining property prices, it was also one of the steepest declines. The drop in overall property prices accelerated from 0.4 percent to 1.5 percent (although this was partly due to a new methodology in recording prices, which uses the net sale price rather than the gross price).
Taking a step back, it becomes easier to see predictions of “bottoming out” as unfounded optimism. Property prices now, even after a year of continued declines, have only fallen by around 10.8 percent since their peak in 2013. Given that prices ramped up almost 60 percent between 2009 and 2013, the drop in prices that we’re seeing are not significant as they may seem. Prices can, and probably will, go lower.
A weak rental market that turns property assets into liabilities
Tenants rule the market, with rental rates being in decline since 2013. We have discussed these rental issues in some detail in a previous article.
Nonetheless, as a recap, rental transactions are rising, while rental rates are falling. This is indicative of tenants taking up shorter leases, in the expectation of negotiating or finding a cheaper rental rate later, given the pressure landlords are facing.
A major concern among landlords are rental rates in prime districts (districts 9,10, and 11), as the economy has soured for professionals in the oil and gas and banking industry. These sectors tend to bring in the professionals who can afford to rent such properties, and the current slump in oil prices and a weakening a financial sector means fewer such expatriates. Among the expatriates that still arrive, they are likely to see lower housing allowances.
As rental incomes decline, and interest rates go up, landlords may see their property assets turn into liabilities. This could result in a rush to offload the property, particularly among over-leveraged investors who made their purchases before the implementation of loan curbs. This will put further downward pressure on property prices, and is likely to result in good bargains for those with cash on hand.
A weak economic outlook
The Ministry for Trade and Industry (MTI) has downgraded the growth forecast to between one and 1.5 percent, down from one to 2 percent. In Q3 2016, all main sectors of the economy contracted, with manufacturing down 9.1 percent, construction down 0.8 percent, and services down 1.3 percent. Singapore is flirting with a technical recession, and growth opportunities from the Trans-Pacific Partnership (TPP) have likely been dashed under America’s new leadership.
Investors are likely to be more cautious, and may withhold property purchases in this uncertain time. Home buyers, who should rightly view their house as a place to stay and not in terms of capital gains or rental income, will see less competition for the properties they want.
The cooling measures are still in place
Enough has been said about this that we probably don’t need to elaborate. Cooling measures, such as the imposition of a 15 percent Additional Buyers Stamp Duty (ABSD) on foreign buyers, have made Singapore property expensive by comparison to Hong Kong, Australia, or the UK (in light of the falling pound after Brexit).
For the time being, Singapore’s property market may be losing a few foreign buyers to other property hotspots. It is improbable that cooling measures will be lifted anytime soon, given they are fulfilling the government’s intentions exactly as planned.
Singapore’s property market is becoming more catered to home owners, and is winding down from the inflated prices in 2013.
Overall, it’s good news for home buyers, less so for investors saddled with expensive properties
Home buyers may have a lot to look forward to in 2017, given the increasing affordability of private housing. First time home buyers in the private property market could find themselves good bargains, given that resellers and developers are both eager to offload their units.
For landlords saddled with expensive property, the coming year may test their holding power if they are dependent on rental income. Nonetheless, given the performance of most property assets over the past decade, we doubt that many landlords would regret the investments they’ve made.
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