Why property in Singapore is heading to become a two speed market

A two speed market refers to a situation where gains or losses are unevenly distributed. Singapore now faces this issue in its current property market – price declines in suburban areas have been faster and steeper than those in the city centre. The situation has consequences for investors in both the long and short term – not only will it affect prices now, it could carry valuable lessons in the way our market behaves during a downturn.

What’s happening with property prices?

Property prices have continued to decline since mid 2013, following the imposition of cooling measures like the Additional Buyers Stamp Duty (ABSD.) as well as structural changes in home loans via the Total Debt Servicing Ratio (TDSR) framework. These policy interventions have caused property prices to fall across the board, as is their intent.

Notably however, in Q1 2016, non-landed home prices declined 0.9 percent in Outside Central Region (OCR) properties and 0.4 percent in the Rest of Central Region (RCR.) In the Core Central Region (CCR) however, prices of non-landed homes rose by 0.4 percent.

This is a reversal of the situation witnessed during the same period in Q1 2014, when non-landed property prices in the CCR fell by 1.47 percent, while prices in the RCR and OCR fell by only 0.3 and 0.9  percent respectively.

A year onward from that in Q1 2015, the rate of decline in CCR prices was showing significant signs of moderation with a decline of 0.6 percent versus a larger correction in the RCR and OCR at 0.6 and 1.1 percent.

The interesting takeaway here is that, during a downturn (albeit one caused by policy intervention rather than market forces), high end properties decline in prices faster, but also rebound faster.

Various factors can be attributed as the cause of this two speed market:

• A race to the bottom
• Greater susceptibility to the overall economy in the RCR
• Nature of market demographics

• A race to the bottom

The speed with which prices fell in the CCR may also account for its faster recovery (if we are indeed seeing a recovery – it may be too early to tell in just Q1 2016.)

There is a bottom limit to how far prices in the CCR can fall. After a certain point, property owners may prefer to bear the momentary pain over a steep loss. They know that the cooling measures are temporary, and that demand for CCR properties will always remain strong.

It could simply be that, compared to the other regions, the CCR hit its (shallow) bottom first. Prices have now moderated to the point where buyers are willing to step in, ABSD or otherwise. In particular owner-occupiers – who are less interested in rental yields and capital gains – may see little more than prime homes at their lowest prices in 10 straight quarters.

In the RCR and OCR however, prices may have some way to fall before they bottom out..

• Greater susceptibility to the overall economy in the RCR and OCR

Home buyers in the RCR and OCR tend to be in the middle to upper-middle of income earners. These properties are also a common target for buyers upgrading from HDB flats.

Singapore has taken a beating from the declining global economy. Layoffs have been at their highest since the Global Financial Crisis in 2009, with 51 per cent of the layoffs coming from older, highly skilled workers (a key buyer demographic for upgraders and mid-range private properties.)

Fears regarding job security, along with shrinking bonuses, have convinced many to put off upgrading plans. This is exacerbated by the cooling measures and the “waiting game” – few are motivated to buy now, when it seems prices can decrease further in the coming quarters.year.

• Nature of market demographics

The simple fact is, buyers of CCR properties are an entirely different demographic. For starters, most of these high net worth individuals are nonplussed regarding structural changes to home loans – almost all of them will meet the TDSR regardless of restrictions, and those with access to private banking have options besides regular mortgages.

For affluent foreigners, the 15 per cent ABSD is not unaffordable. Prime property markets such as Hong Kong have a comparable tax for foreigners at any rate, and high end properties there have not declined as quickly as they have in Singapore. Tax or no tax, CCR properties might look extremely reasonable to these buyers right now.

Moreover, Singapore is still a popular investment destination with foreign buyers. With home prices in London and Hong Kong on the rise, there are taking a second look at properties here for investment purposes. An estimated 92 percent of transactions registered in the Core Central Region still come from foreign buyers.

Finally, there is the issue of holding power. Less affluent property owners may be struggling to deal with rising interest rates, and a softening rental market. To these owners, their properties can become more of a liability than an asset; they will be eager to offload them at steeper discounts.

The more affluent owners in the CCR, however, have much more in the way of holding power. As stated in point 1, there is a bottom limit to how far prices in the CCR can fall. Part of the reason is that, even in worst case scenarios, the owners of these properties often have the resources to ride out the storm rather than accept severe losses.

Landlords should factor the apparent resilience of the CCR into their plans

There are many pros and cons to CCR properties, the chief drawback being the high amount of capital it ties up. But landlords ought also to consider the resilience this market has shown. High-end, luxury properties can weather downturns well, for the simple fact their prime location will still remain a selling point for prospective tenants primarily from expatriates.