reporter2
18-10-22, 11:15
Singapore residential real estate: It’s more than timing the market
Oct 10, 2022
FEW would dispute the resilience of Singapore’s private residential property market. Compared to 12 months ago, however, the property market is now arguably frothier: the economic outlook has darkened, inflation is the highest in over a decade and cheap financing seems but a trend of the past. Just last week, another set of measures was rolled out to encourage prudent borrowing, bringing the property market closer to an inflection point.
Should prospective homebuyers pull the trigger on a unit now or wait for a meaningful price correction? This article lays out our market prognosis and strategies for homebuyers.
Impact of December 2021 cooling measures short-lived
The avalanche of headwinds began with the introduction of cooling measures late last year that raised additional buyer’s stamp duty (ABSD) and tightened financing. The immediate aftermath was a lull of housing activity amid caution. Developers held back on launching sizeable new projects and overall sales volumes fell by a third in Q1 2022, while residential en-bloc activity slowed noticeably.
By the second quarter, however, private home sales had rebounded. The robust take-up of new project launches, such as Piccadilly Grand and Liv@MB in the Rest of Central Region (RCR), reignited market engines and contributed to an acceleration of home prices in Q2 2022. In the Outside Central Region (OCR), the launches of AMO Residence in July and more recently Sky Eden@Bedok and Lentor Modern, were also met with positive reception.
Fresh September 2022 measures to encourage prudent borrowing
The latest measures include raising the medium-term stress test interest rate used for computing loan eligibility from 3.5 per cent to 4 per cent for all housing loans. For Housing Board (HDB) loans, the loan-to-value (LTV) limit was also reduced from 85 per cent to 80 per cent, and a 3 per cent interest rate floor was introduced for loan eligibility computation.
As mortgage rates have already exceeded 3 per cent in recent months, the upward calibration of the medium-term stress test interest rate is necessary to safeguard the debt servicing ability of borrowers in a rising rate environment.
Homebuying affordability will undoubtedly be impacted going forward. Based on our simulation, a household with a monthly income of about S$12,200 would now only be eligible for up to S$1.41 million loan to support a S$1.88 million property purchase, versus a S$1.5 million loan for a S$2 million property purchase previously. The upshot is that some property hunters would have to adjust their budgets accordingly.
Million-dollar HDB homes
The authorities are clearly concerned about the exuberance in the public resale market, of which the bulk of the latest round of measures are directed at. Looking at the residential market as an entirety, the ever-rising HDB resale prices will also have ripple effects on the private property segment. Therefore, policymakers are seeking to strengthen sustainability in the public housing market through the raising of the stress test rate, coupled with maintaining the mortgage servicing ratio (MSR) limit at a prudent 30 per cent. Ultimately, a healthy and sustainable overall market is the government’s objective.
Market fundamentals intact and healthy over the long term
The recent success of various property launches are underpinned by idiosyncratic factors, such as pent-up local demand, and proximity to popular schools. But there are fundamental factors driving the wider market.
For one, the labour market has remained extremely tight, despite slowing economic momentum; economists expect our unemployment rate to reach 2 per cent by the end of the year from an already-low 2.1 per cent presently. Coupled with strengthening wage growth, this has bolstered property demand. Another important driving metric is the continual build-up of household net worth, which hit a record S$2.46 billion in Q2 2022.
Over a longer-time horizon, property demand is expected to still grow at a healthy pace. The secular decline in household size due to declining birth rates translates into sustained demand for housing units, albeit of smaller sizes. The mass adoption of hybrid work norms in the new pandemic normal has also led many to crave individual living spaces. The easing of borders and the new employment pass schemes to draw top talent and to plug skills shortages in the tech sector will help arrest the population decline and provide an uplift to property buying and rental demand.
Near-term bumps ahead
Undeniably, however, over the next few quarters, property demand is expected to moderate, amid multiple headwinds and the impact of the latest cooling measures. Forecasters polled by the Monetary Authority of Singapore expect economic growth to slow to 2.8 per cent next year from an expected 3.5 per cent this year, suggesting a bumpy ride ahead.
The unabated increases in consumer prices and the upward calibration of mortgage payments are likely to weigh on overall consumer spending and big-ticket item purchases, such as homes and cars.
Consequently, primary home sales are expected to moderate from about 13,000 units in 2021 to 9,000 units this year and ease further to 8,000 units next year. We expect overall private home prices to rise by about 9 per cent for 2022 following last year’s 10.6 per cent growth, with a further moderation to 1 to 3 per cent growth for 2023.
In the public resale housing market, transaction volumes have softened for three consecutive quarters in Q2 2022. The stock of millionaires newly minted from the sale of HDB homes is likely to expand at a more modest pace, especially as previous and existing private property owners will now have to wait out 15 months before purchasing an HDB resale flat without subsidies. Homebuying demand for resale HDB flats will be tempered, although seniors aged 55 and above are exempted from the wait-out period if they downgrade to four-room or smaller resale flats.
New pricing benchmarks, but homes are still affordable
Barring a full-blown economic recession or fresh cooling measures, we remain sanguine on the property market. At just over 22,000 units, the stock of unsold units as of Q2 2022 amounts to merely two years of primary home sales, lending considerable pricing power to developers. Most of the unsold units are concentrated in projects due to be completed in 2024 or later, which means developers are in no hurry to clear inventory.
As the market maintains pricing momentum, especially in the fringe and suburban segments, it would be a matter of time before the market shifts to a new pricing normal of around S$2 million for a new suburban home of say, 800 to 1,000 square feet. A household securing a 30-year S$1.5 million loan (75 per cent LTV) would need a minimum income of around S$13,000. For the upgrading cohort aged 30 to 44 years, more than 45 per cent of households draws a reported monthly income of S$12,000 or more, attesting to the relative affordability of new suburban homes even amid eye-watering prices.
Owner-occupiers: forget bottom fishing, needs are key
Given the broadly intact market upcycle, attempts to time the market bottom in the months ahead will likely prove futile. For owner-occupiers, needs-based considerations, such as location, amenities, connectivity, and proximity to schools and families, should take priority rather than bottom fishing.
Based on land sites sold in the last two years, we expect a plethora of interesting launches over the next 12 months, such as mixed-use and integrated developments as well as downtown living options. More importantly than before, prospective homebuyers should carefully consider their ability to service their mortgage in a volatile economic environment and a climate of prolonged elevated interest rates.
Research for value buys
Looking beyond the glitter of the show suites and conducting adequate homebuying research with a level head could allow one to uncover some gems. For some projects which are completed, or nearing completion, developers could be dangling discounts to move remaining units. If prices of new homes have edged up considerably in a preferred locality, perhaps a resale home might be a prudent choice and offer more space for the buck.
We also see relative value in the prime segment, given that Core Central Region (CCR) home prices have only risen by a modest 12 per cent this cycle, compared to a 42 per cent and 36 per cent jump for RCR and OCR home prices respectively. The continual easing of borders and the open-door policy to foreign talent bode well for property demand, especially in prime areas.
https://i.imgur.com/FeLryWV.png
Investors: ride on policies
For investors, aligning one’s property purchase with national policy is one of the safest avenues to ride on healthy capital appreciation over the longer term. The government’s Long-Term Plan Review has clearly demonstrated that beyond a 24/7 vibrant Central Business District, jobs are moving closer to homes.
The unveiling of ambitious plans for the world’s first fully automated port at Tuas, the massive Changi Terminal 5 and the new Paya Lebar precinct would present new employment and property growth opportunities. In parallel, the continual expansion of our rail transport lines and construction of the North-South Corridor will improve connectivity and unlock property values.
Property investment complements a diversified portfolio
In a climate of higher ABSD, taxes and interest rates, one could be forgiven for questioning the viability of property investments. Property demand is a derived demand and property investing is akin to investing in Singapore’s long-term future. Property investing also offers the added characteristic of leverage, albeit a double-edged element.
Our simulations point to a projected internal rate of return (IRR) of 7 to 9 per cent per annum over a holding period of 10 years or more, which could still be an attractive risk-adjusted option for some, especially in a climate of financial market volatility. If ABSD is incurred, an IRR of around 5 per cent per annum is more likely. As such, property investment in the local context remains a meaningful complement to a diversified investment strategy and an effective hedge against inflation.
Ride the cycles
The final straw that may break the housing camel’s back would be an outright recession impacting employment and income, or the roll-out of further measures. While the property market cannot rise in a linear fashion indefinitely, its long-term prospects remain sanguine, on the back of Singapore’s political and economic stability. A reasonable entry price and exit strategy, adequate research and sound holding power will allow homebuyers to ride out market cycles victorious.
Lam Chern Woon is head of research & consulting at Edmund Tie, and Joey Ong is assistant manager (research & consulting).
https://www.businesstimes.com.sg/real-estate/property-2022-oct-issue/singapore-residential-real-estate-its-more-than-timing-the
Oct 10, 2022
FEW would dispute the resilience of Singapore’s private residential property market. Compared to 12 months ago, however, the property market is now arguably frothier: the economic outlook has darkened, inflation is the highest in over a decade and cheap financing seems but a trend of the past. Just last week, another set of measures was rolled out to encourage prudent borrowing, bringing the property market closer to an inflection point.
Should prospective homebuyers pull the trigger on a unit now or wait for a meaningful price correction? This article lays out our market prognosis and strategies for homebuyers.
Impact of December 2021 cooling measures short-lived
The avalanche of headwinds began with the introduction of cooling measures late last year that raised additional buyer’s stamp duty (ABSD) and tightened financing. The immediate aftermath was a lull of housing activity amid caution. Developers held back on launching sizeable new projects and overall sales volumes fell by a third in Q1 2022, while residential en-bloc activity slowed noticeably.
By the second quarter, however, private home sales had rebounded. The robust take-up of new project launches, such as Piccadilly Grand and Liv@MB in the Rest of Central Region (RCR), reignited market engines and contributed to an acceleration of home prices in Q2 2022. In the Outside Central Region (OCR), the launches of AMO Residence in July and more recently Sky Eden@Bedok and Lentor Modern, were also met with positive reception.
Fresh September 2022 measures to encourage prudent borrowing
The latest measures include raising the medium-term stress test interest rate used for computing loan eligibility from 3.5 per cent to 4 per cent for all housing loans. For Housing Board (HDB) loans, the loan-to-value (LTV) limit was also reduced from 85 per cent to 80 per cent, and a 3 per cent interest rate floor was introduced for loan eligibility computation.
As mortgage rates have already exceeded 3 per cent in recent months, the upward calibration of the medium-term stress test interest rate is necessary to safeguard the debt servicing ability of borrowers in a rising rate environment.
Homebuying affordability will undoubtedly be impacted going forward. Based on our simulation, a household with a monthly income of about S$12,200 would now only be eligible for up to S$1.41 million loan to support a S$1.88 million property purchase, versus a S$1.5 million loan for a S$2 million property purchase previously. The upshot is that some property hunters would have to adjust their budgets accordingly.
Million-dollar HDB homes
The authorities are clearly concerned about the exuberance in the public resale market, of which the bulk of the latest round of measures are directed at. Looking at the residential market as an entirety, the ever-rising HDB resale prices will also have ripple effects on the private property segment. Therefore, policymakers are seeking to strengthen sustainability in the public housing market through the raising of the stress test rate, coupled with maintaining the mortgage servicing ratio (MSR) limit at a prudent 30 per cent. Ultimately, a healthy and sustainable overall market is the government’s objective.
Market fundamentals intact and healthy over the long term
The recent success of various property launches are underpinned by idiosyncratic factors, such as pent-up local demand, and proximity to popular schools. But there are fundamental factors driving the wider market.
For one, the labour market has remained extremely tight, despite slowing economic momentum; economists expect our unemployment rate to reach 2 per cent by the end of the year from an already-low 2.1 per cent presently. Coupled with strengthening wage growth, this has bolstered property demand. Another important driving metric is the continual build-up of household net worth, which hit a record S$2.46 billion in Q2 2022.
Over a longer-time horizon, property demand is expected to still grow at a healthy pace. The secular decline in household size due to declining birth rates translates into sustained demand for housing units, albeit of smaller sizes. The mass adoption of hybrid work norms in the new pandemic normal has also led many to crave individual living spaces. The easing of borders and the new employment pass schemes to draw top talent and to plug skills shortages in the tech sector will help arrest the population decline and provide an uplift to property buying and rental demand.
Near-term bumps ahead
Undeniably, however, over the next few quarters, property demand is expected to moderate, amid multiple headwinds and the impact of the latest cooling measures. Forecasters polled by the Monetary Authority of Singapore expect economic growth to slow to 2.8 per cent next year from an expected 3.5 per cent this year, suggesting a bumpy ride ahead.
The unabated increases in consumer prices and the upward calibration of mortgage payments are likely to weigh on overall consumer spending and big-ticket item purchases, such as homes and cars.
Consequently, primary home sales are expected to moderate from about 13,000 units in 2021 to 9,000 units this year and ease further to 8,000 units next year. We expect overall private home prices to rise by about 9 per cent for 2022 following last year’s 10.6 per cent growth, with a further moderation to 1 to 3 per cent growth for 2023.
In the public resale housing market, transaction volumes have softened for three consecutive quarters in Q2 2022. The stock of millionaires newly minted from the sale of HDB homes is likely to expand at a more modest pace, especially as previous and existing private property owners will now have to wait out 15 months before purchasing an HDB resale flat without subsidies. Homebuying demand for resale HDB flats will be tempered, although seniors aged 55 and above are exempted from the wait-out period if they downgrade to four-room or smaller resale flats.
New pricing benchmarks, but homes are still affordable
Barring a full-blown economic recession or fresh cooling measures, we remain sanguine on the property market. At just over 22,000 units, the stock of unsold units as of Q2 2022 amounts to merely two years of primary home sales, lending considerable pricing power to developers. Most of the unsold units are concentrated in projects due to be completed in 2024 or later, which means developers are in no hurry to clear inventory.
As the market maintains pricing momentum, especially in the fringe and suburban segments, it would be a matter of time before the market shifts to a new pricing normal of around S$2 million for a new suburban home of say, 800 to 1,000 square feet. A household securing a 30-year S$1.5 million loan (75 per cent LTV) would need a minimum income of around S$13,000. For the upgrading cohort aged 30 to 44 years, more than 45 per cent of households draws a reported monthly income of S$12,000 or more, attesting to the relative affordability of new suburban homes even amid eye-watering prices.
Owner-occupiers: forget bottom fishing, needs are key
Given the broadly intact market upcycle, attempts to time the market bottom in the months ahead will likely prove futile. For owner-occupiers, needs-based considerations, such as location, amenities, connectivity, and proximity to schools and families, should take priority rather than bottom fishing.
Based on land sites sold in the last two years, we expect a plethora of interesting launches over the next 12 months, such as mixed-use and integrated developments as well as downtown living options. More importantly than before, prospective homebuyers should carefully consider their ability to service their mortgage in a volatile economic environment and a climate of prolonged elevated interest rates.
Research for value buys
Looking beyond the glitter of the show suites and conducting adequate homebuying research with a level head could allow one to uncover some gems. For some projects which are completed, or nearing completion, developers could be dangling discounts to move remaining units. If prices of new homes have edged up considerably in a preferred locality, perhaps a resale home might be a prudent choice and offer more space for the buck.
We also see relative value in the prime segment, given that Core Central Region (CCR) home prices have only risen by a modest 12 per cent this cycle, compared to a 42 per cent and 36 per cent jump for RCR and OCR home prices respectively. The continual easing of borders and the open-door policy to foreign talent bode well for property demand, especially in prime areas.
https://i.imgur.com/FeLryWV.png
Investors: ride on policies
For investors, aligning one’s property purchase with national policy is one of the safest avenues to ride on healthy capital appreciation over the longer term. The government’s Long-Term Plan Review has clearly demonstrated that beyond a 24/7 vibrant Central Business District, jobs are moving closer to homes.
The unveiling of ambitious plans for the world’s first fully automated port at Tuas, the massive Changi Terminal 5 and the new Paya Lebar precinct would present new employment and property growth opportunities. In parallel, the continual expansion of our rail transport lines and construction of the North-South Corridor will improve connectivity and unlock property values.
Property investment complements a diversified portfolio
In a climate of higher ABSD, taxes and interest rates, one could be forgiven for questioning the viability of property investments. Property demand is a derived demand and property investing is akin to investing in Singapore’s long-term future. Property investing also offers the added characteristic of leverage, albeit a double-edged element.
Our simulations point to a projected internal rate of return (IRR) of 7 to 9 per cent per annum over a holding period of 10 years or more, which could still be an attractive risk-adjusted option for some, especially in a climate of financial market volatility. If ABSD is incurred, an IRR of around 5 per cent per annum is more likely. As such, property investment in the local context remains a meaningful complement to a diversified investment strategy and an effective hedge against inflation.
Ride the cycles
The final straw that may break the housing camel’s back would be an outright recession impacting employment and income, or the roll-out of further measures. While the property market cannot rise in a linear fashion indefinitely, its long-term prospects remain sanguine, on the back of Singapore’s political and economic stability. A reasonable entry price and exit strategy, adequate research and sound holding power will allow homebuyers to ride out market cycles victorious.
Lam Chern Woon is head of research & consulting at Edmund Tie, and Joey Ong is assistant manager (research & consulting).
https://www.businesstimes.com.sg/real-estate/property-2022-oct-issue/singapore-residential-real-estate-its-more-than-timing-the