For many who have waited on the sideline since 2020, hoping that an economic slowdown caused by COVID-19 would bring property prices down, the last few years would have been a dispirited period.
Since the start of the pandemic, property prices in Singapore – from older HDB resale flats to luxury condominiums – continue soaring across the board. Even war and a stock market crash last year in 2022 only served to strengthen the property market in Singapore, rather than weaken it.
In the recent 3Q2022 property price index for private residential properties, URA reported an increase of 3.8% in the 3rd Quarter of 2022, compared to the 3.5% increase in the previous quarter.
Many factors affect property prices. This could include interest rates, government policies, the overall performance of the economy and wages in the country. None of these factors are likely to be contributing currently to rising property prices.
For example, interest rates for home loans have risen quickly, with the 3-month compounded SORA currently at 3.10% (as of 27 January 2023). The government also introduced more cooling measures in 2022 to try to curb the property market. Given the slew of retrenchments recently and the poor performance of the stock market, nobody is thinking that the economy is doing well.
So why are property prices still increasing today?
The reason. Supply and demand.
Lack Of Supply Is Causing The Rise Of Property Prices
One of the key determinants of property prices is supply and demand.
Supply and demand affect all goods and services. The idea behind supply and demand is that If demand is high, prices will increase to curb demand. Think of private-hire rides. Slap in a surge pricing of $20 on top of your usual $20 fare and you will find fewer people willing to pay $40 to get to work on time.
The problem here, however, is the price elasticity of demand. Price elasticity of demand refers to how demand changes when prices move. A high elasticity of demand means a slight price increase can lead to much lower demand – think of the price of your favourite egg brand. If prices go up by 50 cents for a tray of ten eggs, you may prefer to buy a cheaper alternative.
When it comes to property, the price elasticity of demand is low. In Singapore, homes are both 1) essential goods (everyone needs a place to live) and 2) represent some form of social status with perceived desirability.
Home being an essential good is easy to understand. After all, even in the most expensive city in the world, we still need a place to live in.
At the same time, a home in Singapore isn’t merely just seen as a form of shelter for many Singaporeans. If all we need is shelter, Singapore has enough homes for everyone. According to Statista, there are 1.51 million residential dwelling units in Singapore and 1.39 million households.
But if you ask yourself, or anyone around you who has purchased a home recently, you would likely find different answers to what a home means to them beyond just being a required shelter.
Some adult children may purchase a home to live and work from home away from their parents. Others may be starting a family and want to be located in an estate near where the good schools are. Many would also look at their homes not just as a place they want to enjoy living in, but also as an asset they can make profits from when they eventually sell it in the future. The home we live in becomes part of our life in Singapore, not just a shelter.
The point here is that, unlike a tray of eggs, the price elasticity of demand for homes is much lower. Even when prices go up significantly, demand doesn’t automatically dissipate. And if demand doesn’t decline, then prices will naturally continue increasing until more housing supply comes into the market.
Supply Shortage Is The Cause Of Property Prices Increasing
Without enough fresh supply of new properties to satisfy the current demand, it’s difficult for prices to stabilise. Sure, as a buyer, we won’t be happy having to pay 30% more compared to three years ago, but chances are, you and many other new buyers will still (un)willingly meet the asking price.
The chart from our friends over at Stacked Home sums it up perfectly.
Source: Stacked Homes
Property prices go in a cycle and for logical reasons. When prices increase, the government and developers will build more homes to curb demand (for the government) or to capitalise on higher prices (for developers). But homes don’t get built immediately and it would usually take at least 3 to 4 years for a property to be completed to ease the housing demand.
As explained by Stacked Homes, nobody could have predicted the demand that came in the wake of COVID-19. As people spend more time at home and continue doing so today due to work-from-home, along with construction delays, demand, and subsequently prices, peaked.
The silver lining here is that the supply glut problem appears to be easing. Since 1Q2022, we have started seeing (a little) more unsold private residential units in the market.
According to the URA 3Q2022 report,
“Based on the expected completion dates reported by developers, 3,619 units (including ECs) will be completed in the last quarter of 2022. Another 20,098 units (including ECs) are expected to be completed in 2023. In total, around 28,800 units (including ECs) are expected to be completed in 2022 and 2023, which is close to three times the 10,400 units completed in 2020 and 2021. This will help to cater to housing needs in the immediate term. More supply with planning approval, totalling around 31,400 units as of the 3rd Quarter of 2022, will be completed beyond 2023.”
Looking At Rental Demand
Rental rates are a great indicator of Singapore’s housing supply and demand situation.
Since most rental contracts in Singapore are usually 1 or 2 years, factors like interest rates and the overall economy are not as significant in affecting rental prices. The key factor to determining rental rate is usually just supply and demand.
Unfortunately, the rental index isn’t rosy for those of us who are looking for a property, either to buy or to rent.
From URA data, we can see that the rental index, up 8.6% for the quarter, has increased much more than the price index, which only went up by 3.8%. So, if you are of the opinion that sellers and developers are profiteering from the current property market in Singapore, wait till you see the rents landlords are charging.
The rental index is also much steeper, especially since 3Q201.
People living in Singapore don’t rent for no reason. Whether it’s because they can’t afford to buy a property for their family in the locations they want, are not able to purchase a property because they are foreigners, are waiting for their homes to be completed, or just need to get out of their parents’ place, they usually have a strong motivation for wanting to rent.
If supply continues to be low and there are not enough available units, these individuals will have no choice but to cough out more for their rent. The result is that the rental index will continue rising as long as supply doesn’t come into the market.
As long as the rental index continues going up, we can expect that the current demand for properties isn’t met yet and that prices will continue to remain resilient. However, once we see rental demand tapering off and the rental index declining, this would indicate that demand is easing and prices may soften.
A caveat though. Even if demand eases, there are still many factors that could push prices ahead in the future even if rental rates no longer increase. For example, if interest rates go down again, the economy does well, or if the government removes some cooling measures, these are factors that can still affect the property market.
In the meantime, we would think that hoping for property prices to decline in 2023, in spite of the rising interest rates, might be wishful thinking. Looking to invest in a residential property today in anticipation that prices will continue increasing as it has over the past few years might also likely be overly bullish, especially when supply eases demand and interest rates continue staying high.
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