Property investment has been on the lips of most investors since 2009. However, with the government’s slew of cooling measures in recent years such as like Additional Buyer’s Stamp Duty (ABSD), Seller’s Stamp Duty (SSD) & Loan-To-Value (LTV) to curb speculation and hot foreign money flowing into Singapore, the market appears to have become soft in recent times.
Recently, there have been quite a fair bit of news discussing about residential properties being sold by its previous owners at significant losses. Could this be the start of a worrisome trend? Let’s take a look at the volume and price trend from the boom time of 2009 to now.
Price and Volume (or lackof)
Chart 1
Source: URA, CBRE Research, Nov 2014
Looking at Chart 1 above, sales volume for non-landed housing (private) has been at its lowest with much reduced activity in new and resale segments compared to the heydays in 2012. Speculative activity is almost non existant in 2014 thanks to the SSD, with the number of sub-sales a shadow of the peak registered in 2009. Sub-sales refer to the sales of units from one buyer to another buyer prior to the completion of the development.
Table 1
Source: Singapore Real Estate Exchange (SRX)
From table 1, we see it’s no surprise that the steep increase in price has also abated, with the highest point reached in Feb 2013. Though prices have started to moderate, we have not experience a reasonable correction. Yet.
If we look at the long term price trend since 1995, we can see that the trough set in 2008, was supported by the peak price levels reached in 1997. Could we expect to experience similar decline (with prices finding support near the 07 peak prices levels) sometime in 2017-2018? There will be investors out there who are “hoping & praying” for such opportune levels.
How are the fundamentals?
Table 2
To examine if the current prices are supported by strong fundamentals, we take a look at the trend of the rentals price index in table 2.
The vacancy rate currently stands at 7.2%, according to the data released by URA for 1Q2015. All the properties launched in 2009-2011, have added to the pool of available units for rent. And naturally, with increased supply, property owners become price takers at lower rent levels. More worryingly, we observe a rounding top being formed with the peak registered in Jan 2013. Is this a sign for weaker rents to come?
It appears to us that the rental market might continue to see further downward pressure given the declining pool of tenants in the market.
Chart 2
Source: MOM labour market 2014
According to MOM’s labour Market 2014 report in chart 2, foreign labour force declined by 2.38% in 2014 compared to 2013.
This trend seems to be more pronounced over the last few years, since the government’s announcement in 2011, on its commitment to have a more sustainable growth rate in the foreign workforce.
What May Happen Next?
Chart 3
Source: mndsingapore.wordpress.com
A quick look at the upcoming pipeline of projects in the residential market (chart 3), shows, we can expect to see 182,506 more units from 2015 to 2018. The supply of BTO units is kept at a steady pace of 25,000 units per year. Currently, the take-up rate is still healthy and the demand from PRs may increase from Aug 2016. (Background: since 28 Aug 2013, new PRs will have to wait 3 years to be eligible for HDB flats). However, the statistics on our population growth rate seems to be less than rosy.
Slowest Population Growth in a Decade
Chart 4: Total population growth rate per year, as of June (%)
Source: Department of Statistics
We have experienced the slowest population growth rate in a decade of 1.3% (chart 4), currently standing at 3.34 million. What we need to ask ourselves is whether the demand from Citizens and PRs are able to absorb the projected subsidized housing supply, going forward.
The projected supply of Executive Condominiums also raises question on the demand for private housing. Will the increased supply of residential units and lower population growth (residents & non-residents) affect the price levels of residential units? How will the rental prices be affected going forward? Will borrowing costs increase in the near future? How will all these affect the attractiveness of investing in residential units? This is something the individual investor has to decide for himself.
That being said, there are other attractive alternative investment property options, like offices, commercial and industrial units or even overseas properties. Whether these options offer better returns than residential units remains to be seen. We will cover it in future articles.
We shall leave you with a quote from Benjamin Graham, “Price is what you pay, and value is what you get”. Please excise your own due diligence before committing your hard earned money on any investment. You may be able to find some rough diamonds if you looked hard enough.
Listen to our podcast, where we have in-depth discussions on finance topics that matter to you.
