How recession could affect property prices

How recession could affect property prices

By Lee Sze Teck, Huttons Asia

June 23, 2022

When the US sneezes, the whole world catches a cold. With the US Federal Reserve raising its interest rate by an aggressive 75 basis points in June 2022 and possibly a similar rate hike in July 2022 to tame inflation, it risks tipping the US economy into recession.

Will the Singapore economy follow suit? What is the impact of a recession on the property market?

The most recent economic contraction in Singapore was in 2020 where the gross domestic product (GDP) declined for two consecutive quarters. Property prices were surprisingly resilient, declining by 1.0% a quarter before climbing up again, ahead of economic growth. The property market leads the economy by one quarter in recovery.

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Does the property market lead the economy in a downturn? Or does the economy lead the property market?

Based on available data going back to 1975, changes in GDP and property prices were compared to see if there was any relationship between the two.

Figure 1 shows that the property market fell first before the economy contracts. Prices in the property market fell 0.8% in 1Q1998, well ahead of the economic contraction in 2Q1985. Before the Asian Financial Crisis in 1997, the property market dived in 3Q1996 after the government imposed harsh cooling measures to curb speculation.

The property market also turned first in 3Q2000 during the dotcom bust in 2001. Only during the Global Financial Crisis and Covid-19 downturns were synchronised with the dip in property prices.

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Economic growth during the period where property prices contracted were also correspondingly lower.

The recovery in the property market on the other hand is instantaneous with the economic recovery. Most of the time the recovery in the property market is sharp and swift.

It appears that the property market is a better indicator of economic health. It runs counter to a commonly held belief that an economic contraction will lead to a property market downturn.

There might be other reasons why the property market will fall before the economy. In the past, speculation in property was common, especially during the mid-90s when buyers could flip options easily. Some speculators also cut prices to limit their losses.

The property industry is dependent on easy access to low-cost financing. During the Asian Financial Crisis, some banks put a limit on loans to developers and raised interest rates. That in turn put pressure on highly leveraged developers to cut prices in order to move sales.

The tighter credit led to less development activity, which in turn, impacted the construction sector in the late 1990s to early 2000s. That set off a domino effect on employment and other sectors of the economy thus resulting in an economic contraction then.

If the property market is a leading indicator, how can we use this to make better buying decisions?

Without a doubt, the increase in interest rates is a concern. However, developers are more prudent and less leveraged compared to the past. Furthermore, the chances of them cutting prices to meet the five-year timeline for additional buyer’s stamp duty remission is low.

As of 1Q2022, the level of unsold stock in the market at 14,362 is very low. This is 62% lower than the peak in unsold units in 1Q2019.

The Monetary Authority of Singapore (MAS) has ensured that speculation is reduced to a minimum with the Seller’s Stamp Duty. Speculation is at a low of 2.6% in 1Q2022 compared to 31.1% in 2Q1995. Buyers are prevented from stretching themselves thin with a total debt servicing ratio of 55%.

Will property prices trend lower in 2Q2022?

This is highly unlikely. The two major launches in 2Q2022, Piccadilly Grand and LIV @ MB had a median selling price of $2,175 psf and $2,405 psf, respectively.

The resale price index for condominiums by a real estate portal showed that prices have increased by 1.1% in April and May. Demand for homes is still strong in June.

Property prices are expected to remain on a growth path in 2022. Elevated construction costs will result in higher selling prices. Low unemployment, sustained income growth and a rising HDB resale market means that there will be a steady demand for homes.

Should prices turn south, past experiences have shown that the recovery is sharp and swift!

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Lee Sze Teck is senior director (research) at Huttons Asia