Overall property prices have been decreasing since the introduction of cooling measures in mid-2013. With prices continuing their downward trajectory, we are seeing more traffic at various show flats in Singapore. Whenever we visit these show flats, the common thing that we hear from property agents is that buying property in Singapore “confirm plus chop, will make money in the long run”.
Everyone is entitled to his/her opinion. That said, property agents have a vested interest in trying to sell you a property. Let us take a look at the fundamentals to see whether you should agree with them.
Singapore Is Becoming Less Dependent On Foreign Labour
In the 2011 General Elections, the hot topic that blazed the hearts of Singaporeans was the high influx of foreign labour. Wage ceiling was perceived to be artificially capped due to the low cost of foreign labour. With the poorest performance in the elections to date by the incumbent governing party, these voices were not ignored.
Reforms were introduced to direct Singapore to become a productive country that will eventually rely on technology, rather than short-term cheap labour.
Since 2011, non-residents’ (everyone else living in Singapore other than Singaporeans and Permanent Residents) year-on-year (yoy) growth has been at its lowest for a non-recession period.
Exhibit 1: Singapore Intends To Not Be Reliant On Foreign Labour
Source: Singapore Department of Statistics
With the direction of reducing reliance on foreign labour, we do not expect the government to make a u-turn in the mid to long term. This is especially so when the government has already invested in schemes such as the Productivity and Innovation Package, SkillsFuture and tax reduction programmes.
With the non-resident population expected to grow at a slower pace, there will be lesser demand for property. This will ultimately affect the prices of housing in Singapore.
Singapore’s Residents Are Becoming Older
The term “ageing population” is not an unfamiliar term. This has been an issue that even Mr. Lee Kwan Yew is unable to resolve. Actually, it is a problem that no developed nations has a solution for.
Exhibit 2: Median Age of Singapore Residents
Source: Singapore Department of Statistics, DollarsAndSense
The median age of Singapore residents (citizens and PRs) is 31.9 in 1995. Fast forward to 2015, the median age is 39.6, an increase of 7.7 years in the span of twenty years.
We projected Singapore residents to age at the same rate (1.1% per year) as the last twenty years. This will result in Singapore reaching a median age of 49.2 by 2035. If we continue to “import” younger foreigners, Singapore will have a very old population in just another 20 years time.
The younger people in Singapore are the ones who generally make most of the property purchases. This is the case as they start to think of setting up a nest for their young family. However, with a bulk of the population being much older, prices of property will not have that latent demand required to sustain a consistent price increment.
Slower Growth Is The New Norm For Singapore
In August 2016, the Ministry of Trade and Industry narrowed its GDP growth forecast to 1% – 2% from 1% – 3%. This is on the back of slowing growth in China, weakening European markets, Brexit, the US’ Presidential Elections, and the largely ineffective Abenomics. The slower growth for Singapore seems like the new normal. This is something that we have not experienced much in the 20th century.
Exhibit 3: Singapore Growing At A Much Slower Pace In The Last 5 Years
Source: Singapore Department of Statistics
Singapore has come out of the 2008/2009 Global Financial Crisis (also known as the Subprime Mortgage Crisis) with little damage due to multiple government and private sector interventions.
Nonetheless, Singapore has been experiencing growth levels much lower than our 30-year average of 8% after 2010. Referring to Exhibit 3, growths lower than the 30-year average happens only during a crisis and immediate post-crisis recovery years.
Property prices in Singapore have a relatively high correlation with nominal GDP growth. This is logically so because the value of real estate is largely dependent on the country’s ability to generate wealth. We believe that Singapore has entered into a new normal where slow growth will stay for the long run. Thus, property investments will not necessarily yield earnings in the long-run.
Exhibit 4: Property Prices Have High Correlation With Singapore’s Growth
Note: Property price index and GDP index are indexed at 1Q2009
Source: Urban Redevelopment Authority of Singapore, Singapore Department of Statistics, DollarsAndSense
Interest Rates Can Only Increase From Current Levels
Due to the 2008/2009 Global Financial Crisis, global interest rates have been artificially pushed down to near 0%. This is unprecedented as the impact from the crisis was expected to be worse than the Great Depression between 1929 and 1939.
Central banks globally rushed to intervene and rejuvenate their own economies. They did so by lowering base interest rates and flushing liquidity into the market (quantitative easing).
The extended period of low interest rates has caused the world to think that low interest rates are here to stay forever. The good news is that interest rates are not expected to bounce back up so quickly. The bad news is that the Federal Reserve (Fed – United States’ Central Bank) has dropped hints that increasing interest rates might finally be feasible for them in 2016.
Normalised interest rates in Singapore since the 2000s is in the range of 2.5%-4%. However, Singapore Interbank Offered Rate (SIBOR) is currently in the range of 0.8% – 0.9%. If the Fed were to lead the increment of interest rates, we expect Singapore’s interest rates to slowly creep up as well. This will result in fixed assets – property – to depreciate in value in the long term.
Confirm Plus Chop, Will Make Money In The Long Term
We might be naysayers, but all fundamentals are showing that long-term property prices are not expected to be a sure shot at making you rich. Property prices will at best, in the long run, match inflation.
Unlike those who were able to purchase a property in the 70s and 80s, those who purchase a property today will see limited upside in the future.
Therefore, the next time you head into the show flat and meet a property agent who will most likely pitch this “confirm plus chop, will make money in the long term” idea, you might want to ask them about these topics. They will probably give their own interesting take on why Singapore’s properties will surely increase in value in the future.
Bonds and Fixed Income