It’s safe to say that majority of people have been keeping up with the news a lot more closely in the past year or so. Apart from COVID-19 updates, another piece of news that many of us may be keeping track of is Singapore’s rising property prices.
According to the Urban Redevelopment Authority (URA) statistics, private property prices increased 2.2% in 2020 and have already increased 4.0% in the first half of 2021. Every other month, we’re also seeing one famous businessperson or another snapping up another Good Class Bungalow (GCB) in Singapore. And most recently, the frenzied buying of Pasir Ris 8 – where prices for the same units were adjusted upwards at least six times in a single day – has been described by DBS analysts as “asset bubble behaviour”.
We look at whether it’s fair to say Singapore’s property market is in an asset bubble right now.
What Is An Asset Bubble?
An asset bubble usually happens when prices rapidly increase beyond its true value or intrinsic value because of market behaviour rather than fundamentals.
This is also why it’s next to impossible to be certain that prices are in a bubble at any point in time. The bubble must burst – signifying that it was increasing in an unsustainable manner. Another way of looking at it is that if everyone could agree that prices are in a bubble, then bubbles would never form in the first place.
Why We Think Property Prices Are Not In An Asset Bubble
Because we can only tell in hindsight whether prices were in a bubble or not, it would be foolish for us to stand firm on any argument that property prices are in a bubble (or not in a bubble) today.
While in certain instances, property price movements may feel like they are in a bubble (like when DBS analyst highlighted the Pasir Ris 8 incident), on the whole there valid arguments about why property prices are not in a bubble today.
#1 Property Prices Have Been On An Upward Tick Since The End Of 2017
The last property market crash happened at the tail-end of 2013. Even then it would be a stretch to call it a crash as prices have been deflating over nearly four years rather than a rapid fall.
Similarly, property prices started increasing at the tail-end of 2017. It’s been on an uptick for about four years now. Furthermore, the price increases in each year have been relatively moderate: 7.9% in 2018; 2.7% in 2019; 2.2% in 2020; and in the first half of 2021, property prices have risen about 4.0%.
This can hardly be called a spike in prices. In fact, if we look at the private property price movements in Singapore since the 1970s, we can see that there have been much steeper spikes and dips.
Source: Department of Statistics Singapore
#2 We’ve Just Only Topped The Last All-Time Highs In The Property Market
Looking at the chart above again: we can also see that the property market has generally moved in cycles. While some are shorter than others, each high has been higher than the last high and each low also higher than the last low.
What we can also see is that property prices have only just breached the last all-time high, set in 2013. Again, this is hardly a case for prices running way ahead of fundamentals. Also, as the cycles show, when prices come crashing down, it should not be a surprise. Prices also hardly increase in a uniformed fashion, the zig-zagging in the chart shows that property prices encounter dips even as it is in an upward cycle.
#3 Property Rents Are Finally Increasing
Throughout the end-2017 to end-2020 property price appreciation phase, rentals have remained relatively flat. This may have been one indication that prices are not moving in tandem with rental demand or that returns were getting suppressed as prices rose.
Since the end of 2020, this has changed too. Rentals too are ticking upwards, which may provide support for the property price increases.
Source: URA’s 2nd Quarter 2021 Real Estate Statistics
#4 Interest Rates Are Still Low
It’s been several years that interest rates have sustained at low levels, with home loans even going sub-1% in the first year.
Even when interest rates threatened to increase, COVID-19 hit to keep interest rates low. The U.S. Federal Reserve has also indicated that interest rates will be sustained at low levels until at least 2023, albeit with some hikes.
Low-interest rates give buyers more firepower in the property market – enabling lower monthly mortgages, higher returns, the ability to buy with a lower income and more.
#5 Far Fewer Private Residential Properties In The Foreseeable Pipeline
According to the latest figures released by URA for the 2nd quarter of 2021, there are just 47,095 private residential units (excluding ECs) that are either under construction or planned in Singapore’s property pipeline currently.
Source: URA’s 2nd Quarter 2021 Real Estate Statistics
If we compare this with the pipeline during the last property market high in 2013 (before property prices started falling), there were as many as 88,623 units in the foreseeable pipeline that year. This is nearly double the private property pipeline we have today.
Source: URA’s 1st Quarter 2013 Real Estate Statistics
As COVID-19 continues to delay development projects and potentially add costs in the form of more stringent safe distancing measures on construction sites, more intense testing regiments for construction workers, and better accommodation conditions at dormitories (and likely other forms), it isn’t far-fetched to think that private property prices will have to increase just because of these reasons in the future.
#6 The Preference For Better/More Living Space In Singapore
Even without the COVID-19 factor, the average household size in Singapore had fallen to 3.2 persons in 2020 from 3.5 persons in 2010.
At the same time, according to the Population Census 2020, more Singaporeans are choosing to live in private residential properties – especially condominiums. In 2020, 16.0% of residents lived in condominiums and other apartments, compared to only 11.5% of people in 2010.
With COVID-19, more people may be willing to stretch their funds to afford larger/better spaces that they can work out of. People can easily be more willing to allocate fewer funds to things like weddings, car purchases and overseas holidays (that will have limited utility with COVID-19 restrictions) and prioritise living space that they can enjoy more because of COVID-19.
There’s Always A Probability That We May Be In A Property Bubble Today
The one big question that’s lingering over this question is COVID-19. What will happen once we’re past COVID-19?
From the points above, many of them have been in the works over the past few years or longer. Property prices have been ticking upwards since the end-2017, and it feels like we entered the cycle before COVID-19 hit. More people in Singapore are also choosing to live in private properties over HDB flats. Interest rates have also been kept at a low level for more than a decade.
What COVID-19 may have impacted is the supply side. Without COVID-19, developers can try to accelerate construction works. However, certain added costs look likely to stay, such as better (and probably more expensive) living conditions for workers and stricter testing regimens on construction sites.
Likewise, the trend to view our homes as a subset of our working space may also be a longer-term trend in the works. Even if people start going back to the office, many companies will likely have a hybrid model or some form of work from home component going forward.
So, while no one knows for sure whether this is a bubble or not, there are underlying reasons and longer-term trends that may be supporting increasing private property prices in Singapore.
Even if we’re not currently in a property market bubble, more frenzied buying behaviours such as the launch of Pasir Ris 8 may escalate the situation into a bubble.
Government More Than Willing To Cool Property Market
If we’re already in a property bubble today, the government has shown that it is more than willing to intervene to cool demand. Any new property cooling measures implemented should work to slow down an unsustainable price increase. Of course, it could also work to artificially crash property prices, but this seems like an unnecessary and lose-lose outcome for the government.
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