By Mr. Propwise

Ah, how quickly the year has flown by. It’s that time of the year again, where I dust off my crystal ball and peer into it, then stick my neck out and try to say something intelligent about the future direction of the property market.

2013 was certainly an interesting year, where despite the predictions of lots of analysts and gurus (and I’m guilty too), the residential property market managed to shrug off seven rounds of cooling measures, a property tax hike and the MAS’ Total Debt Servicing Ratio to register positive gains – the URA Property Price Index (PPI) is up 2.0% in the first three quarters of 2013.

Property market at an inflection point?

But looking at monthly property indices suggests that the Fourth Quarter of 2013 could see a reversal into negative price growth, although likely by a small magnitude. There are several reasons why this weakness is likely to continue into 2014 and beyond.

First, the HDB Resale Price Index (RPI) has turned negative in 3Q2013 with a 0.9% decrease. The last time the HDB RPI fell was in 1Q2009 during the Global Financial Crisis, and it only fell by 0.8% then. A doubling of HDB prices since 2005 have created a “wealth effect” that supported mass market prices as HDB flat owners could sell their unit at a high price and upgrade to a private condominium.

Now that HDB prices are falling, this effect will shift into reverse gear, where HDB owners will find it difficult to sell their flat at a good price, thus sapping demand from the mass market segment of the market, which incidentally has been the strongest segment. Recent reports of falling Cash Over Valuations (COV) for HDB resale flats is further confirmation that this trend is continuing into 4Q2013.

Figure 1 – URA PPI vs HDB RPI (Source: URA, HDB,

Second, record upcoming completions are likely to put pressure on both property prices and rentals, especially coupled with the slower expected population growth as the government slows the inflow of foreigners due to the locals’ unhappiness. The recent Little India riot will certainly not help this trend.

Based on URA data, there are close to 85,000 units of private residential properties that will be completed in the next few years. Looking at the breakdown of supply, 2014 and 2015 will see completions of around 20 thousand units per year, and this will spike to over 26 thousand units in 2016. This is nearly twice the yearly average of fewer than 10 thousand units between 1996 and 2012.

Figure 2 – Upcoming private residential supply (Source: URA,

And if we add on the completions of public housing as well, the upcoming supply tsunami looks daunting. The scaling back of the 1H2014 Government Land Sales program is recognition of the large amount of upcoming supply and the uncertainty it creates for the market.

While several bullish developers are still bidding up land prices in Singapore, others are increasingly going overseas as they see less upside locally. Developers such as CapitaLand, Hiap Hoe and Oxley Holdings are branching out more to foreign markets such as China, Australia, Malaysia, UK and Cambodia. Even property billionaire Kwek Leng Beng, Chairman of City Developments Limited (CDL), has called buying land in Singapore at current prices “suicidal” and predicted an up to 5% fall in property prices.

Prospects of QE tapering

The root cause of the buoyant property prices is the protracted low interest rate environment after multiple rounds of Quantitative Easing (QE) by the US Federal Reserve post the Global Financial Crisis. This has propped up the prices of most yield-based assets, including property. While the Fed has indicated a gentle pace of QE tapering, the market reaction to any significant tightening of liquidity could be stronger and more violent than people might expect.

Figure 3 – URA PPI vs 3-Month SIBOR (Source: URA, MAS,

Also, even if interest rates do not shoot up right away, borrowing costs can still rise as banks charge a higher margin (SIBOR + X%) to give themselves a profit buffer against rising interest rates. We’re already seeing this happening. And when borrowing costs rise, the stress on heavily leveraged buyers will go up, and the attractiveness of property itself as an asset class also decreases as the net cashflow it provides falls. This will be exacerbated if rentals are also under pressure at the same time.

So what should investors do?

Looking at analyst predictions of Singapore property prices, I estimate that the range is somewhere in the range of prices staying flat to falling by 20%. In other words, there’s lots of uncertainty but the skew is to the downside.

I myself do not like making forecasts, because I believe the exact timing and magnitude of property price movements is dependent on too many unknowable events. Instead, I prefer to base my property purchase and investment decisions on my analysis of where we are in the cycle and what has historically been the best actions to take at each point.

Members of Property Market Insights will know that we are currently at the Late Bull stage of the Property Market Cycle Model. This means that the best thing to do is to sit tight and wait for a correction. You might have to wait for years, but it’s much better than giving in to the social pressure to buy now at a high price and see your savings get wiped out later.

On that cheery note, here’s wishing everyone a Happy New Year and a Healthy and Wealthy 2014!

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