By Mr. Propwise
From the URA’s recent 2Q2013 Private Residential Property Price Index (PPI) release, property prices have continued to defy gravity and have even accelerated – the 2Q2013 Residential PPI was up 1.0% on a quarter-on-quarter basis, versus the 0.6% increase of the previous quarter.
Singapore property prices at an all-time high…
Based on analysis of the URA numbers done by the Singapore property research site PropertyMarketInsights.com, at the current levels the price index is 21.4% above the previous 2Q2008 peak, and 18.7% above the previous all time high in 2Q1996.
Figure 1 – URA Property Price Index
On the surface, it would appear that the strength of property demand, supported by low interest rates, has outweighed concern over the worrying economic situation in Europe and China, and the prospect of rising interest rates US (and hence globally) when the Fed tapers. And not to mention the dampening effect of multiple rounds of government measures since 2009.
…but is mainly supported by strength in the Outside Central Region…
The rate of price growth differed widely across the various market segments. In the Core Central Region, prices of non-landed private residential properties actually fell by 0.2% versus a remarkable increase of 3.8% in the Outside Central Region, an acceleration from the 1.4% increase in the previous quarter.
This is the first time that the PPI in the Outside Central Region has surpassed that of the Core Central Region.
Figure 2 – URA Property Price Index for the Different Regions
This unprecedented phenomenon begs the question: who are buying these overpriced properties in the fringes of Singapore? Well, it turns out the answer is regular middle income Singaporeans. Since 2009 Singaporeans have been growing as a proportion of total buyers, and made up 80.1% of buyers in 2Q2013.
Figure 3 – Singaporeans as a percentage of total purchasers
The pullback in non-Singaporean buying has also been affected by the much harsher Additional Buyer Stamp Duties imposed on Permanent Residents and Foreigners in January 2013 in the Seventh Round of government cooling measures.
Will property prices correct?
Figure 4 – Change in URA Property Price Index
The question now hanging on most people’s minds is: when will property prices correct? Prices have been defying gravity despite the threat of a weak global economic environment, propped up by close-to-zero interest rates thanks to the multiple rounds of Quantitative Easing by the US Federal Reserve.
Figure 5 – 3-Month and 12-Month SIBOR
The continued resilience of property prices despite the previous seven rounds of government measures, and the MAS’ measures on the Total Debt Servicing Ratio framework to limit leverage, increases the probability of further measures to cool sentiment. But it is not clear what more the government can do other than to refine the current measures (e.g. increase ABSD further?).
I believe that we will only see significant levels of price declines if: 1. There is an external crisis that causes a panic, which we had in each of the previous three declines (e.g. Asian Crisis, Dotcom Bubble, Global Financial Crisis); or 2. If interest rates rise significantly thanks to the Fed’s tapering, which will happen when the US economy strengthens and unemployment rates fall, potentially in late 2014. In the meantime the abundant global liquidity situation and sustained low interest rates will continue to support Singapore property prices, although at the margins I think we are fairly close to the end game.
Where will property prices go going forward? There are a couple of ways to think about this question. First, based on the Property Market Cycle Model of PropertyMarketInsights.com, we are in the Late Bull Stage of the market. This means that the upside potential risk is limited while the downside risk is significant. Second, while everyone believes that low interest rates will continue to prop property prices up, the large upcoming supply of more than 100,000 units could depress prices if demand is not able to keep up (and we are already seeing fairly weak rental growth). Third, as I’ve mentioned before, unexpected crises (“black swans”) tend to occur when we least expect it, especially when everyone has become complacent.
I believe property prices cannot continue to defy gravity forever, and that investors looking to buy property in this market should be very cautious.
By Mr. Propwise, founder of top Singapore property blog Propwise.sg and PropertyMarketInsights.com, an essential property market analysis site that helps buyers and sellers make profitable investment decisions. Visit his sites to download free property reports.