2015 has been a tumultuous year. Macroeconomic factors such as China’s slowdown, and raising of the Fed interest rate have resulted in a slate of ramifications on Singapore’s residential market. The full impact is likely to be felt in the coming year, but it’s not all bad news.
According to the URA property price index, the steady decline of property prices has remained in a sustained flux. Prices have tapered by about eight per cent over the past eight quarters, and are expected to fall further. This is not unexpected. As early as June 2015, BNP Paribas suggested that property prices could continue to decline by 10 per cent in the next two years.
This expected decline in sale prices presents a potential dilemma for sellers hoping to seek good gains for their homes. Buyers on the other hand are buoyed at the prospect of paying for homes below market value. 2012 and 2013 saw seven rounds of cooling measures – the most significant being the Additional Buyer’s Stamp Duty (ABSD) and Total Debt Servicing Ratio (TDSR) framework.
The ABSD is additional tax imposed on foreign buyers, Permanent Residents and Singapore citizens purchasing their second or subsequent property. At present, the ABSD for foreigners stand at a whopping 15 per cent. The TDSR caps monthly repayments at 60 per cent of the borrower’s monthly income, after factoring in outstanding personal loans. As a result, the Property Price Index (PPI) has seen a decline of four per cent in 2014, with a further dip in 2015. Despite repeated calls from developers to claw back current cooling measures, the government has been adamant in sustaining a more tempered domestic market.
The global economic index has not fared well in the last two years and with the looming oversupply of unsold units and the recent Fed interest rate hike, property prices are expected to feel the push downwards.
In January 2015, property analyst Ku Swee Yong slammed investors and real estate agents for being in denial. The same article asserted that the residential property segment is heavily oversupplied. The prediction seems to be panning out, with BNP Paribas also predicting that prices could bottom out in 2018/2019 on the back of high supply and tighter immigration laws.
According to the URA, “The number of private residences due for completion will peak in 2016 at around 22,000 units”. Landlords are likely to drop prices to compete for tenants. Ms. Alice Tan, Director at Knight Frank has chimed in on the forecast price depreciation: “Overall rentals of private homes could slip by 4 to 6 per cent year-on-year by the fourth quarter of 2016, in view that population growth next year is not likely to exceed the 1 per cent of annual increase seen in the last two years and with the likely continuation of tight immigration and foreign workforce polices.”
Mortgage rates fell to record lows from 2008 when the American Federal Reserve (the Fed) dropped interest rates to recover from the financial crisis. As of mid December 2015, the Fed on the back of a recovered American economy has raised the interest rate by 025 per cent. Moving forward, normalization will kick in with a slew of subsequent rate hikes. This signals the demise of an era of cheap property loans that lasted all of a decade. Ultimately, the rate hike by the Fed will impact property loans indices – Singapore Interbank Offered Rate (SIBOR) and Swap Offer Rate (SOR) which are pegged to US interest rates.
A higher interest rate means steeper monthly repayments, greater difficulty in qualifying for loans, and lower gains upon resale. It places significant pressure on landlords, who face both higher loan repayments and difficulty in raising rental rates.
In spite a somewhat dystopian view of things to come in the Singapore property ecosystem, there is the proverbial silver lining we can look forward to. Demand for Singapore property remains strong. The Singapore government will eventually remove or filter some of the more harsher aspects of the current cooling measures and when this happens, prices will experience a strong recovery.
For long-term property investors and homeowners, this is barely a blip on their radar – it won’t mean much in 10 or 15 years. Homebuyers too can look forward to good news. Property prices are tapering with 2016/2017 presenting viable investment opportunities.
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