by Ku Swee Yong, Advisor to HugProperty and Shannon Aw Qian Tong, undergraduate from the Department of Real Estate, National University of Singapore.
Positive news in the real estate sector started to stream in early in 2017. We began the year with promising data from the manufacturing sector. The value of imports and exports also rose. Several new properties geared up for launches supported by the efforts of a few thousand agents distributing flyers, sending emailers, knocking on the doors of prospective investors and staging road shows all over Singapore. Developers with leftover units in a few dozen projects around Singapore also rode on the media and marketing hype.
Adding to the extensive market outreach of the property agents, real estate and financial analysts weighed in by proclaiming that residential market prices have already reached a bottom and will rise in 2017.
Are we really at the bottom? Are prices going to move up? Some market watchers point out that after 15 consecutive quarters of price declines, surely the market has to turn up!
Amongst the most bullish proclamations was a 60-page report by a leading global institution titled “Property Prices Inflecting and On Track to Double by 2030”. Published on 12 April 2017, mainstream media hungry for positive news immediately highlighted the key points: we are at the end of a protracted downtrend since 2013, property prices will rise from 2018, prices will sustain a 5% increase in dollar per square foot terms every year such that by 2030, the average values of private residences will double!
Market watchers, commentators, property agents and investors discussed the report in online forums and over social media. Several opined that in order for prices to double by 2030, Singapore would need more immigrants to hit a population of at least 7 million, or even limit new housing supply to market. A few also wondered about the wider implications of a doubling of housing prices.
We liked that the report is packed full of justifications about how strongly the Singapore economy will grow, and how that will push up housing prices. However, in trying so hard to stretch our imaginations about economic growth and home price growth, several justifications in the report seem to tread on the fringe of the debatable and dubious.
We have over a dozen questions about various areas of the report. In this piece, we would like to highlight the areas where the authors’ arguments could be based on stronger foundations.
The report claimed that property prices will double by 2030 if all major economic and demographic factors are aligned. Three key points which contribute to the doubling of prices are: (1) the shrinking home sizes, (2) the Gross Domestic Product (GDP) and income growth, and (3) the household formation rate of singles and high-skilled Employment Pass holders.
Key Point 1 from the report:
“Average unit sizes of private residential units sold by developers fell from 1.3k sqft to 1.1k sqft between 1995 to 2016, while the average size of five-room public housing units has fallen from 123sqm to 110 sqm since 1997. We believe home sizes will continue to decline at a rate of 1% p.a.”
This argument assumes that a decrease in home sizes will lead to an increase in the price per sqft. Due to the generous dollops of cooling measures imposed on the residential market since 2009, developers have squeezed home sizes to keep the investment quantum low and to improve affordability for investors. This has resulted in brisk home sales for studio-sized, 1-bedroom and 2-bedroom units which are mainly purchased by investors who think that they can subsequently rent to low-budget tenants.
Our questions: Why does the report only consider the sizes of apartments sold by developers and conclude that “home sizes will continue to decline at the rate of 1% p.a.”? In the event that developers only launched and sold apartments of 800sqft in the year 2018, would the report then infer that average home sizes would decline at an even faster rate of say, 5% per year? What about resale transactions? Older properties which are larger in size are more often purchased by families for their own use, and these are less frequently transacted than investors’ units which are, on average, smaller in size.
Fact 1: The average size of Singapore’s private homes did not reduce steadily from 1,300 sqft in 1995 to 1,100 sqft in 2016. The report charted data of developers’ new sales only. For new sales, large sized apartments and penthouses were the rage in 2006-2008 and therefore average home sizes transacted in that period climbed above 1,500 sqft in early 2007. Sizes of new homes sold do not represent the sizes of all private homes in Singapore. Private homes include landed properties. However there were few new landed housing projects launched in the last 10 years as compared to compact apartments in high-density developments and the latter contributed to the shrinking sizes of new homes. Do note that new home sales account for about 10,000–12,000 units per year in the past 10 years but the total stock of private homes reached 348,000 by the end of 2016. Therefore, the smaller average sizes of 10,000 new homes every year hardly weigh down the average size the entire stock of private homes.
Fact 2: The sizes of new HDB flats have remained constant since 1997. HDB made a switch to reduce flat sizes in 1997 and since then, the average sizes of all new 3-room, 4-room and 5-room flats have been maintained. Our gradually shrinking household sizes caused by a falling birth-rate has made HDB build a larger proportion of 3-room and 4-room flats. To cater for the needs of retirees and singles, HDB has also increased the number of studio and 2-room flats in the past few years. As a result, the proportion of 5-room flats has become smaller. The report claimed that “the average size of five-room public housing units has fallen from 123sqm to 110sqm since 1997”. And it followed with the statement “we believe home sizes will continue to decline at the rate of 1% p.a.” Uninformed readers may form an incorrect impression that HDB will reduce the sizes of new flats at a rate of 1% p.a. in future!
Certain data trends are not suitable for extrapolation. Would it be reasonable to extrapolate the world record times for a 100m sprint down to 3 seconds? Would it be reasonable to think that the average Singaporean will live in homes that measure 600 sqft in 50 years’ time? Would this imply that about 50% of Singaporeans live in homes that are 200-600 sqft?
We find it puzzling that the report concluded that Singapore’s average residential sizes will shrink by 1% p.a. from 2017–2030 simply based on the average sizes of new private home sales in the last 20 years and a groundless suggestion that HDB will reduce flat sizes in the next 14 years simply due to one reference data point from 1997.