Most will agree, 2020 was an unprecedented year. However, despite the pandemic, the Singapore real estate market remained resilient. Factors such as government relief, low interest rates, housing cooling measures, developers tactful pricing and cash-rich investors, kept the property demand steady. Notably, private residential property prices as measured by the Property Price Index (PPI), according to URA have been rising steadily(1). Therefore, the question in mind is, whether property prices will continue to increase in 2021 and beyond?
In this article, I will cover the market sentiment and factors that influence the supply and demand of properties and how those influence the overall property market direction.
1. MARKET SENTIMENT
Singapore entered Phase 3 on 29 th of December 2020 and was the first country in Asia to receive a delivery of the long-awaited Covid-19 vaccine 2 . As reported in the papers recently, factors such as the Singapore Government handling of the crisis coupled with stability and business-friendly policies implemented, continue to attract foreign companies to relocate their headquarters, operations and/or manufacturing to Singapore. Aside from those companies’ commitment to invest in Singapore, such business decisions create a dynamic labor market attracting foreign talent which in turn supports the existing healthy rental market here.
2. LOW INTEREST RATES
Rental prices remained steady in 2020 and the rental yield was supported by today’s low interest rate climate. As recently indicated by Jeremy Powell, the chairman of the Federal reserve, interest rates will increase ‘’No Time Soon”3. Governments will remain committed to support the businesses that borrowed during the crisis just to stay afloat. Any increase in the interest rates, will likely jeopardize the economic recovery and it seems that governments might not be prepared to do so.
Lets see if this scenario is likely based on facts and corelating trends seen in the past.
3. PROJECTED ECONOMIC GROWTH
Typically, when the economy starts expanding (measured by the gross domestic product - GDP), the Property Price Index (PPI) follows. Currently, the GDP is down while the PPI is holding up. Given the recent positive news in battling the pandemic, the Singapore Government will continue its efforts to ensure the local economy improves and expands. That means that GDP will grow and PPI will also improve.
Similarly, the trend between PPI and Straits Times Index (STI) shows a positive correlation. When the stock market goes up, property prices are either stable or increase. With the economy poised to improve, STI is already turning upwards and so will the real estate market.
4. SUPPLY and DEMAND
The government is the main supplier of land in Singapore. From the graph below, we see a falling trend in the supply of land.
The development and construction of a building takes years, resulting in a lagged relationship between demand and supply for properties. Currently, the balance of ready-to-sell flats is running low compared to demand. Demand is poised to increase as the economy shows signs of improving health.
Reduction in Government Land Sales
Private New Home Sale graph, shows new launches in 2020 sold higher than in 2018, depleting further the available supply.
Resale market in 2020 was so buoyant, it exceeded the sales of 2019.
Another source of land in Singapore is collective sale (en-bloc) land recycling. From the graph below, it is clearly visible that it is almost at record low in its cycle, indicating lag in supply of new land in the market.
The purchase price of Government Land Sale (GSL) indicates the future development prices. The recently transacted land at outside central region (OCR) Tanah Merah at $930psf ppr, excluding the 5% Developer ABSD, indicates that the prices at OCR will need to be transacted at $1700-1800 psf indicating an anticipated price trend and narrowing the gap between CCR (Core Central Region), RCR (Rest of Central Region) and OCR (Out Of Central Region).
Price of government land price increasing: land bids article
The existing RCR land sales graph below confirms the upward trend.
Note: Green bars indicate selected sizable collective sales deals in the RCR
It is clearly evident the price trend is upwards as indicated in the OCR Transacted lend bids. The land cost in 2016 and 2017 was between 23.8% and 27.3% lower compared to only few years later in 2019.
OCR Transacted land bids
Source: URA
CONCLUSION:
The sentiment for 2021 is optimistic and the overall economic recovery is a very likely scenario. According to economists and analysts in the Monetary Authority of Singapore (MAS) quarterly survey, Singapore's economy will grow by 5.5 per cent in 2021. The pace of growth will be even higher if the pandemic is contained by successful deployment of the vaccine worldwide4.
As we have discussed earlier, 4 key things support our thesis for a Singapore real estate market bouncing back and further growing in 2021 and beyond:
The positive sentiment and investor confidence in the strong governance of Singapore and economic growth.
Economic expansion and capital appreciation due to: land scarcity and strong rental through local and increasing foreign demand.
Investors use property to leverage their cash at low interest rate and hedge against inflation.
Lastly, a continuous demand for properties, seen even during the pandemic, will continue and pressure property prices to the upside, as too much money will be chasing fewer goods.
However, the government is monitoring closely the housing prices trend and most likely will act by imposing stricter cooling measures if the prices run ahead of fundamentals. This is unlikely to happen in the 1st half of the year, leaving a window of opportunity to consider the various options on the market before the probable tightening of the cooling measures.
The task is now to pair with a competent real estate consultant assess risks and make a well-informed decision to enter the market and optimise your returns.
1. https://www.ura.gov.sg/-/media/Corporate/Media-Room/2021/Jan/URA%20pr21-01a.pdf