Over the past 3 months, the media has been reporting mostly good news about the Singapore Property Market and Local Property Brokers have been upbeat about the property market. Against a backdrop of what looks like a very promising – The Great Singapore Upgrade for the Property Market, this article attempts to provide deep insights that investors should consider as well as questions investors should be asking.
Below are three facts which most investors already know in the Singapore Residential Property Market :
1. Transaction volumes are increasing
2. Property price index (PPI) is increasing
3. Developers unsold units are decreasing
These three facts have led investors to feel upbeat on the market and may have also created a group of investors who have fear of missing out (FOMO) the next property uptrend.
Before making your next property purchase, there are questions and facts to examine to identify whether the property market will go into a sustainable uptrend, or will there just be a knee jerk reaction due to the influx of en-bloc buyers coming into the market. The facts which are discussed in this article will be crucial in making that decision.
1. Interest Rates
Firstly, many people know that interest rates are going up, but to what extent can interest rates can go up to?
Fig 1. Source: moneysmart.sg
Figure 1 shows that the Singapore 3 Month Interbank (3M SIBOR) is on an uptrend after an extended period of low rates. Although there are many different rate packages one can take, including fixed rates, these rates will eventually increase, as mortgage interest rates are not fixed for the whole loan period. We can see that before the last 2008 financial crisis, 3M SIBOR rates were as high as 3.5% and that would lead to a mortgage rate of about 4%. There is also a possibility that we will see rates higher than 4% over the next 2 years.
Investors who are taking a mortgage should therefore ensure that even if interest rates go to 4% or 5%, they are still able to afford their monthly installments. In addition, if
the property purchased is an investment and rental is required to cover monthly mortgage payments, the next factor discussed is a critical point of consideration.
2. Vacancy Rate
Fig 2. Source: URA (OCR-Outside Central Region, RCR-Rest of Central Region, CCR-Core Central Region)
Based on URA data, vacancy rate of private residential units have been increasing from 2014. The latest Q3 2017 overall vacancy rate was 8.4%, up from 8.1% in Q2.
Investors who rely on rental income to pay for mortgage payments need to consider the following:
- If unit is vacant for 6 months, do you have the funds to pay for the mortgage payment?
- If rental drops by 30%, ie. From $3000 to $2100, are you able to top up the difference for the mortgage
- Will there be potential supply and demand mismatch in the future, for example will there be enough demand to take up the number of units in that area in future.
When buying an investment property for capital gains or rental income, it is important to find out which areas have growth potential to reach that objective. For example, if an investor is seeking rental income, it is important to find out areas where there will likely be increase in future tenant demand or huge existing tenant demand. If you would like to find out where such areas are, look out for our next article about the geographical localities in Singapore.
3. Supply and Demand Balance
To better understand the current market position, we look at the supply and demand balance. Currently, URA data reports and shows only planned and approved supply of units that will be completed from 2018 to 2021 and beyond. These are represented in Figure 4 below as the red bars. Due to the recent enbloc frenzy and aggressive release of Government Land Sales (GLS) sites, it is important to project the number of future supply coming into the market. The recent enbloc sites and GLS from 2017 will likely be completed from 2021 onwards.
In order to project the future supply o
f both, enbloc sites and GLS, the following future supply (fig 3.) and assumptions (fig 3.) of sites being completed are used.
2017 2018 GLS 1H 7400 8045 GLS 2H 8125 est. 8000 Enbloc 19198 est. 18000 Assumptions and Notes 2017 1H GLS Complete in 2021 2017 2H GLS Complete in 2022 2017 Enbloc Complete in 2021
2018 1H GLS Complete in 2022 2018 2H GLS Complete in 2023 2018 Enbloc Complete in 2022 2023
Fig 3. Source: URA, REC Research
The projection of the pipeline of supply coming into the market (fig 5.) from 2021 to 2023 and beyond shows that pipeline supply reverting back to oversupply levels, which was seen between 2014 and 2017.
There are currently about 3000 enbloc households, which creates the estimated future supply of 20,000 units. Assuming that these households buy 1 unit each, in 2018 there will be 3000 transactions added into the market. This is a 12% y-o-y increase in private residential transactions in 2018. Likewise, if each household buys 2 units, 6000 transactions will be added and a 24% y-o-y increase in private residential transactions. Either scenario may increase transaction volumes temporarily, but does not soak up all the pipeline supply created in 2017.
- Overall, there is a net increase of future supply and will likely lead our residential market into an oversupply situation come 2021.
Fig 4. Source: URA, Exclusively collated by REC Research
- 4. Population Growth & DemographicsUnderstanding Singapore’s Population Demographics is important in understanding the population’s buying preference for the types of properties they may purchase. Although there are many permutations to what buying behaviors could be, we will attempt to look at it in a practical and logical manner.
We look at the Singapore’s population growth (fig 5.) and note that we have averaged just over a 1% increase yearly. The population growth rate is likely to maintain its current path, as commented by Managing Director of Monetary Authority of Singapore (MAS), Ravi Menon that “the current demographics slowdown is so severe that it is neither feasible or desirable to try to offset it completely through immigration of foreign workers” when he was commenting on Singapore’s aging population (fig 6.).
An aging population means more citizens will be planning for their retirement which would mean potentially right sizing to a smaller home to cash out some funds for their retirement. Some may feel that the house is too big and prefer a smaller house. It is reported that some owners whose houses are enbloc intend to buy HDB flats instead of purchase another private condo as their home. This change in buying preference is not positive for the current enbloc cycle as there may be less demand for the future supply of private residential properties.
2010 2011 2012 2013 2014 2015 2016 2017 (1H) Total Population Growth Rate (%) 1.8 2.1 2.5 1.6 1.3 1.2 1.3 0.1 Non Resident Growth Rate (%) 4.1 6.9 7.2 4 2.9 2.1 2.5 -1.6
Fig 5. Source: Singapore Population Trends 2017
5. Inflow of foreign buyers or talents
A recent report by Bank of Singapore noted that in 2017, foreign buyers bought about 1600 units (5.6% of total transactions in 2017), down from the peak of close to 6000 properties in 2011 (15% of total transactions in 2011). A possible reason for the decrease is due to the 15% Additional Buyer Stamp Duty (ABSD) imposed for foreign buyers. However, even if the government reduces or remove ABSD, foreign buyers from China and Indonesia which formed the majority of buyers in 2011 may not rush back to buy properties here due to
Capital Controls and Tax Amnesty imposed in the respective countries.
Foreign talents have also seen a reduction in growth rate over the last 3 years as seen from Non-resident growth rate (fig 5.), which contributes to the increase in vacancy rates for private residential properties. Even if the government starts to attract new foreign talents again for our new industries like FinTech, Cyber Security and Artificial Intelligence Industries, there will be lag time before vacancy rate improves.
Our view is that property investment will continue to be very lucrative over the long term. However, against a backdrop of mixed data and noise in the property market, location selection is more important than ever. Property investors 20 years ago could just buy almost any property in Singapore and would make a profit if they held till today. Over the last 5 years, there are groups of buyers who made profits, while also a large group who did not profit. Property selection hence is the key to invest profitably and data based analysis can aid in the process of buying a bargain in a growth area.