Why Private Property Prices Might Start To Revert To Normalcy

January 18, 2022

There’s a common saying that “What goes up, must eventually come down!” In fact, this is one of the basic Physics lessons we picked up from our schooling years. But, would this logical basic of the law of gravity explain or even apply in the context of the overall Singapore property markets? Have you wondered why property prices have been on an uptrend trajectory despite the various roller-coaster dips and rises in the global markets.

Scarcity and Interest rates, a real game changer or not?

Those who might have been inching to purchase or to sell a home would have known by now that local property prices, be it private and/or public residential prices have been on an uptrend. In fact, for the whole of 2021, based on the latest flash estimates of the Urban Redevelopment Authority’s URA Private Property Index (PPI) released on January 03, 2021, private residential home prices, on the whole, climbed 10.6 per cent as compared to 2020’s 2.2 percent increase.

During this period, and ever since the US Federal Reserve undertook contingency measures by ramping up its so-called Quantitative Easing (QE) programme in March 2020 by injecting the financial markets with massive amounts of liquidity, so much so that stock market prices, and other so-called “risk-on” assets like gold, cryptocurrencies, even property prices have shot up massively. This is despite the never-ending news that human cases of the Covid-19 pandemic were mounting.

However, local interest rates, as measured by the latest Singapore Overnight Rate Average (SORA) benchmark rate which is the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank Singapore Dollar (SGD) cash market in Singapore between 0800 hrs and 1815 hrs (Singapore local time) seems to point a different picture and has been on an uptrend since January 2020 as shown by the daily chart shown below:

In case you might be wondering why the SORA Index have been on an uptrend since the early days of 2020 given the intensity of the pandemic outbreaks globally. Well! The SORA rates are basically the calculation of compounded interest rates in a standardised manner, and we think that the general uptrend in the interest rtes might be due to the massive liquidity into the markets and the massive recovery in the overall interest rates as the development of vaccines are being put on an accelerated basis, and many countries have gradually opened up their economies following the massive inoculations of their populations.

December 2021 private home prices are showing declines

With the rise of interest rates as shown previously by the SORA Index chart, the latest December 2021 new home sales seem to point the opposite way by trending down by 58 per cent on the back of the December 16th, 2021 announcement of the tighter Additional Buyers’ Stamp Duties, along with the lowering of the Total Debt Servicing Ratio (TDSR) by five percentage points from 60 per cent to now 55 per cent, and tighter loan-to-value (LTV) limits for HDB loans from the previous 90 per cent to now 85 per cent, while LTV limits on home mortgages offered by private FIs remained unchanged at 75 per cent.

Such dire news, can property prices sustain the highs in 2022

With rising SORA rates, along with the tighter mortgage loan borrowing measures, and not to mention declining cryptocurrency prices, lacklustre start for global stock market indices in 2022, increase in crude oil prices, continued reports of supply chain bottlenecks, local curbs on foreign labour due to the several false starts to the vaccinated travel lanes (VTLs), delayed completions of many Built-to-Order (BTO flats), and the rising pandemic case numbers with the Omicron variant being the key dominant Covid-19 disease that the Singapore government is monitoring, the biggest question most of you would like to know is whether local private home prices would still continue to sustain its rising upward trajectory as compared to last year?

Indeed, this question is quite challenging to address as the housing market, on the whole, are still in the process of digesting the latest property cooling measures. But, why do we phrase our title to this article as the local housing markets could be different as compared to previously.

Well! We are not exactly taking a contrarian view of the local private property market, but we would like to advise home owners to probably adjust their home price appreciation (HPA) expectations.

We would also like to emphasise again that we are not exactly predicting a market crash is about to happen, all we like to reiterate our earlier point that we would like to advise home owners to probably take a step back, and relook at their price expectations given the market situation we have explained earlier.

The US Fed might start hiking interest rates earlier in 2022

As you might probably read the financial news section that the US Federal Reserve (Fed) would kickstart their interest rate hikes, which could be in March 2022, as most market analysts expect and from the various hints being communicated by several Fed insiders. The rising SORA rates could be the next interest rate reference measure to keep a close watch.

Private home prices are starting to become unaffordable

While it is sort of an inspirational instinct for many Singapore households to upgrade to bigger and newer homes, and the ultimate so-called Singapore dream of owning landed properties, and multiple properties, and achieve financially freedom, it is also equally important for home buyers and sellers alike to probably take a step back, and keep a close watch on the housing affordability factor when valuing their homes.

Indeed, while both the US job markets and our local jobs have more or less restored to their pre-pandemic levels, along with the rising wages, and the restoration to the upward wage recovery trajectory, but based on the latest home price to income ratio published by Statistica, both new home and resale home prices are outpacing household income as of 2020 and when compared to 2019.

Source: Statistica

While we do not have the latest 2021 data, but judging by the latest 2021 flash data estimates on private home prices increasing by 10.6 per cent for last year, and the latest Mercer 2021 Total Remuneration Survey (TRS) which showed that actual wage growth improved by 3.3 per cent in 2021, along with market expectations of a 4.4 per cent increase for 2022, there seems to be a huge gap between local home prices, and wage growth in general.

So, what if we are wrong

Yes. You might would also want question us on whether we, as real estate professionals, are probably disservice to you in touting down the property market when everything seems to look normal, and based on the current market views expressed by many analysts, and other real estate professionals who seems to hold a common view that home prices, in general, are not going to fall anytime soon. This is despite the tightened housing loan measures, and the rising home prices that are being reported in the news for the past several months.

Well! The answers that we are going to provide are that we are not in a position to be crystal ball gazers, or market gurus. But, as real estate professionals, we do have the professional obligations to present to you the facts, and using these facts, we provide our views that are supported by the data.

While we do seriously understand the substantial weight that many home buyers and sellers, alike, have placed in our opinions, we feel that we might let you down, or be a disservice to you if we do not present the facts, and figures to show what is happening in the current global markets that could send ripple effects to the local property market soon.

Neither do we want to paint a rosy picture of the local housing markets which you will probably might have heard it many times from other real estate professionals.

All we are saying that based on the data, and  the facts we have presented, which we do also want to acknowledge that there are some pieces of data we highlighted earlier could be backward looking, but if there are emerging trends showing up from these data, we think that you, as potential home buyers, and sellers need to also take into consideration when valuing your homes.

We are also not against the overall desire to upgrade either. We think that it is perfectly fine to upgrade as this is a natural progression most of us need to take in order to secure our retirements. But all we are saying that home buyers, sellers and the market in general, do need to reset their HPA expectations. We also think that nothing is forever good or bad, but if the local property market conditions are indeed showing some forms of mean reversions, we think that you could stand a good chance to be better prepared for any unexpected outcomes, if you are also similarly prepared and willing to reset your HPA expectations.

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