Market players know that the three most important variables in property are demand, supply, and cost of capital.
Uncontrollable forces tend to influence demand. When economies move into a recession, buyer sentiment typically drops along with demand. Workers are uneasy about the future and, thus, less likely to invest in property.
Meanwhile, in the modern era, Central Banks have turned to monetary policy as a quick fix to stimulate the economy. They lower short-term discount rates, which means your local bank can reduce its mortgage rates. Now, the cost of capital needed to buy property is less. (It is much more difficult to use fiscal policy and cut taxes because that means reducing government services or deficit spending.)
Those homeowners who have good savings jump at the opportunity to upgrade in a “buyer’s market.” They are in search of bargain sale prices and lower mortgage payments. Demand increases slowly but steadily, putting upward pressure on prices. As the economy rebounds, more and more people re-enter the market attracted by rising property prices. The herd mentality takes over and drives up prices further.
In contrast, supply is not nearly as fluid as demand and cost-of-capital. The Government determines land-use rights and, thus, new supply. It takes time for new supply to come online.
When demand starts to get ahead of supply, as it did in Singapore prior to the Global Financial Crisis, there is upward pressure on prices. Faced with a perfect storm of high demand, insufficient supply, and a low cost of capital, the Government intervened.
Cooling Measures are quite effective at reducing demand quickly. Constraints on borrowing take people out of the property market. Upfront stamp duties make it riskier to breakeven and get a good return on investment. As a result, monthly transactions for private, resale apartments are off 74.7% since the peak in April 2010.
Short of setting prices (i.e., rent control) or making Cooling Measures permanent, it is difficult to bring prices down using stamp duties and borrowing constraints. As long as supply is fixed and the measures are temporary, sellers resist putting their homes on the market. They try to wait it out. The result is housing prices resist dropping below their fundamental value.
The most effective tool to bring down prices is supply. We see this in the data. By comparing new supply with SRX Property’s prices indices, we can see that the Government was able to jump start HDB supply much faster and, as a result, its price index peaked sooner and its prices, so far, have dropped further than that of private flats. (HDB is down 10.7% since its peak in April 2013 while private resale is down 7.8% since January 2014).
Furthermore, Government has an extra-powerful policy tool for the HDB market that is unavailable in the private market. It can offer Built-to-Orders at discounted prices. This helps reduce prices in two ways. First, BTOs put downward pressure on nearby, comparable HDB resale flats. Second, new owners must sell their HDB resale flats before moving into their BTOs. As a result, this puts more HDB resale flats into play than otherwise might be the case in a down market.
Looking Ahead to 2016
At the UBS Wealth Insight Conference on Tuesday, Finance Minister Heng Swee Keat confirmed that the Government has no plans to ease the Cooling Measures in 2016.
With the uncertainty of Cooling Measures out of the way, let’s return to the data for hints about property prospects in 2016.
The HDB supply graph shows that the Government will continue to bring on new supply but at a decreasing rate compared with 2011-2014. This will continue to put downward pressure on prices in areas that will receive this new supply. However, in unaffected areas, one can expect prices to be more stubborn as they have already adjusted to the Cooling Measures environment.
In terms of the private market, by maintaining the Additional Buyer’s Stamp Duty (ABSD) in 2016, the Government is signaling that the private market has insufficient supply to handle pent-up demand from both overseas and local buyers. Indeed a record supply of completed units is coming on line in 2016. This is on top of a significant pick-up in supply over the last two years. As a result, expect more downward pressure on prices but don’t expect the bottom to fall out.
Buyer’s Market
Days-on-market and price spreads continue to be abnormally high in both the HDB market and non-landed private market. Also, Transaction-Over-X-Value, which measures market sentiment, is trading at or below par. (For details, see graphs at SRX.com.sg/research.) It’s still a buyer’s market. It will continue to be as more flats come on the market in 2016.
A shrewd buyer can take advantage of the fact that market sentiment is still neutral to negative and negotiate the price down, perhaps below X-Value. However, it is going to get harder and harder to do this as prices settle into the new supply-demand equilibrium.
Even though it is still a buyer’s market, real estate is not homogeneous. What is happening at the national level may not reflect your neighborhood circumstances or your personal financial situation. Sellers make money in down markets and buyers get good deals in up markets. Before transacting in any market, the best thing to do is monitor the value of your home and neighborhood via SRX.com.sg/property-tracker, consult a trusted real estate agent and other experts, and decide whether it is the right time to buy, sell or rent.
Sam Baker is co-founder of SRX Property, an information exchange formed by leading real estate agencies in Singapore to disseminate market pricing information and facilitate property listings and transactions. For more details on the data and calculations used in this article, visit SRX.com.sg/research.
Article was published on TODAYOnline News