Tue. Oct 19th, 2021

Personally, I have been part of the real estate sector since the early 2000s. Over these two decades, real estate prices have risen sharply. If we look at the price index of private residential property, if a property had been bought in the early 2000s and maintained to this day, despite the ups and downs, the property would have almost doubled in value.

Private residential property price index

Private residential property price index (source: Data.gov.sg)

This is one of the reasons why real estate investing is such a hot topic in Singapore’s sparse land. Many would be real estate investors who analyze historical data from the past and yearn for their pot of gold in the real estate market. To truly understand the mindset of property buyers, we need to stick to the concept that buyers buy properties for their own use and / or for investments.

At first, most property buyers were more concerned with buying a property for their own use. Buyers would try to buy a property near where they know, perhaps close to their parents. They may also want to buy a property that houses their parents, a helper, and a study room. For those who could afford flats, it was not uncommon for them to acquire a flat based on their lifestyle. For example, those who liked to play tennis would look for condominiums with tennis courts. In the past, the train network was less extensive and it was less common to hear buyers buying a certain development to go up along the price increase when the area undergoes some transformation. The fact is that the first real estate buyers did not have to do too much homework when securing a property that would increase in value over the next 20 years. The Singapore government did it for them and in general almost all the properties that were bought in the early 2000s have a considerable profit.

Fast forward 20 years later and here we are in the year 2021. Property prices have almost doubled according to the private residential property price index. Even though we are in the midst of a global pandemic and facing the worst economic contraction in Singapore’s independent history, we still see property prices rising. According to the index, declines in property prices accompanied periods of economic contractions. In the mid-1980s, the Asian financial crisis of 1997, SARS, the dotcom bubble, and terrorists attacked in the early 2000s and the global financial crisis in 2008. Despite extremely bleak economic figures, real estate prices continue to rise. What has changed, then?

1) The Singapore government is now the key driver of asset prices

Without the huge unprecedented budgets to try to save jobs and boost Singapore’s economy, unemployment figures would be much higher and there is no doubt that asset prices, like real estate, would have fallen. There is a correlation between unemployment and real estate prices. Schemes such as the Employment Support Program and the SGUnited Jobs Initiative helped keep unemployment low. In my opinion, artificially low. With jobs and salaries insured and with little or no opportunity to spend all that income on international travel, that money had to go somewhere. For some, this was the right time to enter the real estate market. The idea was born that even if a major recession cannot hamper the real estate market, we think about where prices could go when the economy opens up. The result was a 3.3% increase in the private residential property price index in the first quarter of 2021.

Real estate statistics for the first quarter of 2021

Real estate statistics for the first quarter of 2021 (source: URA)

There is currently a lot of talk about incorporating more cooling measures to try to counter the rise in property prices. If you identify the last period in which the property price index fell over an extended period of time, i.e., from 2013 to 2017, this was the result of several rounds of cooling measures of property government of Singapore. The key now is not to identify when there is a recession, but to identify Singapore government policies that can support, raise or curb real estate prices.

2) More property buyers are focusing on property as an investment tool rather than for their own use

It is rare to see property buyers who meet requirements such as “common rooms should fit in a double bed” or that the property includes a maid’s room, as the family has a maid. The main motivation for buying a property from a fairly large proportion of property buyers is that they can take out the property later for an orderly profit. This is why the master plan for certain areas is so focused. The history of potential transformation of certain areas to become the next satellite business district has significantly increased property prices. Some prices around the Paya Lebar areas have even exceeded $ 2,000 per square meter for 99-year leasehold developments (Park Place Residences and Esta Park). Today, shoppers are more receptive to living in places they are less familiar with. As they are more mobile, the set of potential buyers is also expanded for each particular area. It helps Singapore’s transportation network become more complete over time.

3) Revenues have increased

I say this with a warning. While revenues have risen globally, they have not risen as much as asset prices. Property prices are rising at a much faster rate compared to income, but this is a phenomenon that is not unique to Singapore. In many cities around the world, due to the huge government stimulus bands, asset prices will inevitably rise. I can’t imagine the situation in Singapore becoming like in Hong Kong, where a large proportion of its educated population finds it difficult to pay for their property. However, Singapore approaching such a scenario will not be ideal either. With millions of dollars of HDB prices becoming more common (there were a total of 82 of these transactions in 2020 compared to 64 in 2019 despite the COVID-19 pandemic), we can never be sure that prices of the properties are always kept affordable.

4) Family units have changed

Despite government efforts to increase the birth rate, the size of families has shrunk. Due to the wealth of a more trained workforce, incomes are higher and many households may choose to have their own private space instead of living with their parents. There is a common mindset of young couples who buy an apartment built to order (BTO) at HDB, who sell it for an ordered benefit after meeting the minimum period of employment (MOP) and who use the benefits to make an upfront payment for a flat promotion. mount the wave of property prices. It has previously worked for many buyers and some base their plans on previous market performance.

My view on all of this is that property prices in the next 20 years will not experience the same growth as the previous 20 years. The private property price index in the first quarter of 2021 was 162.2 while the index for the first quarter of 2001 was 91.1. This represents an increase of 78% in the last two decades. However, if we compare the growth of the private property price index in the previous two decades, ie the first quarter of 2001 to 91.1 against the first quarter of 1981 to 32.2, this represents a price increase of 183% in the same period of time. To move forward, it would be prudent for buyers to understand that price increases and the history of financial wealth are not exactly the same as before. The profits that can be made in the real estate market over the next two decades should be less than the 78% price increase in the two decades that just preceded us. If you cover it with the large amount of stamp duty and poor rental performance, buyers may not get as much profit as they can.

My advice to property buyers would be to go back to the basics about why people bought a particular property. Identify properties that suit your family’s needs and not just because you believe the property will make you money in the future. The retention period for profiting with the purchase of the property should be longer than before proceeding. You need to be comfortable both physically and financially with the property you are buying.

Yours faithfully,

Daryl Lum

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