Factors Affecting Singapore Property
The best property investment strategy is one that will work well within our financial capability, investment objectives and risk profile.
It is also necessary to understand the factors that will affect the property market and eventually determine the property value (price) at the time.
Singapore’s residential property market is very much influenced by the state of her economy, population growth, availability of mortgage and interest rates, which determine the demand for property. All these demand-side factors will eventually affect the property prices, which itself will drive sentiment of the market and, therefore, the demands.
Besides factors from the demand-side, the property prices will also be affected by the supply-side factors, which include the supply of housing and supply of land for housing developments.
During periods of rising demand but limited supply, we will see rising property prices and rents.
Another key factor is government policy that at times will intervene to stabilise fast rising property prices.
Macro Factors Influencing Property Market
The economy of the country will set the direction of its property market, at least in the near term.
As Singapore’s economy is intertwined with the global economy, any negative economic ripples from regional or major economy will inevitably affect Singapore.
The economic growth will determine the income growth and the unemployment state of the country, hence, will have a great impact on her property markets.
Demand for property is dependent on the people’s income. As the economic growth rises, the incomes of the people will also increase, resulting in their ability to spend more on housing.
Then, homeowner will be more willing to upgrade to a bigger or a private residential property, while investors will have more capital for property investments.
This will also increase demand and eventually push up prices of property.
As property can be considered a luxury good, therefore, its demand is usually income elastic - rising incomes will lead to a bigger portion of the income being spent on housing.
Similarly, during recession, falling incomes will result in people not able to afford new housing and those who lose their jobs may not be able to pay their mortgage repayments, leading to a default and with their home repossessed.
If the economic growth is in an adverse state, companies may wind down and jobs will be lost. When unemployment is rising, fewer people will be able to afford a property or upgrade their housing.
Furthermore, the fear of unemployment may discourage buyers, especially investors, from entering the property market.
Therefore, when people perceive things to be good because incomes rise and unemployment levels are low, buyer’s confidence is at its top and people are willing to spend their money, such as on property.
So, during good economic growth situation, people are more inclined to take on mortgage loans and make large financial commitments on property.
This will in turn increase the demand and pushes property values up.
On the contrary, when income growth slows and unemployment rises, people will be concern about our financial security and become risk adverse in parting with our money.
This will cause demand to decelerate and property values will become off the boil.
When the population grow, so does the need for housing. If the supply is slower in catching up with the increasing demand, than the property price would likely to surge.
As at 2019, Singapore’s total population is about 5.7 million and is projected to grow over the coming decade to about 6.9 million by 2030.
According to Department of Statistic Singapore, the number of resident households in 2019 is 1.37 million while the average household size was made up of 3.16 persons.
Based on this household size benchmark, though the average household size for non-resident will be much lower, Singapore will need at least another 0.38 million housing units to meet housing requirements for the 1.2 million increase in population over the next decade. An average of 38,000 units per year.
Furthermore, the Statistics Singapore reported that the total residential units as of 2018 is about 1.46 million.
After catering to the 1.37 million resident households, the remaining 90 thousand units is a tight figure to house the 1.1 million non-residents (about 12 per unit), excluding construction and domestic workers who mainly reside in dormitories or with their employers.
With the potential growth in population and slower rate of supply, the demand for housing will continue to rise.
It is also expected that the increased demand will be driven by the immigrants and the anticipated larger number of single-person households.
In 2017, Morgan Stanley had expected Singapore property prices to double by 2030, based on its projection that home prices will increase by 5% each year on a per square foot (psf) basis from 2018 to 2030.
During 2008 Global Financial Crisis, we saw the US property market collapsed due to easy access to finance home loans. The ease of getting a mortgage loan facilitated the increase in demand for housing as more people were able to buy. Resulting in eventual burst of the housing bubble.
After the crisis, many countries had tightened their financial regulations and imposed more stringent rules in lending criteria, requiring a bigger deposit for home loan.
This had effectively reduced the availability of mortgages and demand fell.
As we can see from the chart, the home loan applications in Singapore (presumably scrutinised for eligibility by bankers before submission) have also fallen after 2008, since the tightening of the rules.
Although there are many banks in Singapore willing to offer home loans at competitive rates, the stringent eligibility criteria imposed by the authority have made it harder for low credit rating buyers to borrow.
Notwithstanding, HDB also provides concessionary housing loans for eligible Singapore citizens to buy HDB flats, our public housing.
Therefore, the easier it is to obtain a home loan, the higher the demand for property purchase.
Apart from easier credit standards, factor such as low interest rates also contribute to increased demand in property purchase.
When interest rates are low, people are more willing to take on debts. Financing the purchase of a home become more affordable because the amount of interest required to pay is more manageable.
And when more buyers flood the market, the demand for property increases.
When the supply of property is limited, people in a low interest rate environment would tend to purchase even more – further increasing the demand.
Conversely, as interest rates affect the cost of monthly mortgage repayments, a period of high-interest rates will also increase cost of mortgage repayments. This will, in particular, reduce the return of investment for property investors.
Hence, higher interest rate will lower the demand for property purchase.
Supply of Housing
Related to population growth and housing shortage is the rate of supply of new housing.
In slower market conditions, profit margins tend to drop, construction costs continue to rise, and buyer demand is declining. These make large developments much less attractive for developers in private residential market.
Conversely, if the markets are hot with buyers, development and construction activities will speed up. Developers will be eager to gain a pie in the markets.
The tightening of housing supply, corresponds with heightened demand from our growing population, can help to maintain pressure on private property prices in the longer-term.
On the other hand, HDB will continue to develop public housing on a sustainable rate based on demands and projected population growth to fulfil the housing needs of Singaporeans.
The supply or shortage of housing units will ultimately affect property prices, especially private residential properties.
However, this is also dependent on the supply of land for residential developments by the government.
Supply of Land
When there is an abundant supply of land for developments released in a certain area, price growth within that housing area will be limited. Especially, in new developing estates/ towns where there are many sites available for private residential developments.
Conversely, in areas, like matured estates, where land is scarce and development is limited, the lack of land supply often strengthens property values and shield them from drastic falls, if it happens.
Under the Government Land Sales (GLS) programme, parcel of land sites will be released every half-yearly for developers to bid for private housing developments. The number of sites available for release is controlled by the Ministry of National Development based on the demand for new housing during that period.
When more sites are released at the same period, the bidding prices by developers will drop, resulting in a lower selling price for the property.
Conversely, if developers compete for a limited number of new sites released, the land price will go up, leading to a higher selling prices of property units.
Government policy can be effective in shaping the demand and supply balance of the property markets.
A good example of how government policy encourage purchase of public housing is the HDB Housing Grants for subsidised flats.
The government has also changed its regulatory limits by increasing the income cap for Executive Condominiums (ECs) and Build-to-Order (BTO) flats by $2,000 from $12,000 and $10,000, respectively. This is to allow more middle-income Singaporeans to own HDB flats.
In order to curb the fast-rising residential property prices due to hot property market, the “cooling measures” implemented by the government have also been highly effective.
With the Total Debt Servicing Ratio (TDSR) framework, Additional Buyer’s Stamp Duty (ABSD) and the increased supply of public and private housing, sales activity in Singapore’s residential property market have been controlled to a manageable demand and pricing levels.
The GLS programme also enables the government to regulate the supply of sites for new residential developments, thus the property prices.
The key determinant of the property market is the property prices. It affects both the demand and supply-side factors discussed above, and vice versa, is also affected by these factors.
Apart from the macro factors influencing the overall property pricing that shapes the sentiments of Singapore’s property market, there are also micro factors that have more immediate influences on the values (prices) of the properties at specific areas or localities.
Some of the micro factors are:
Location to Amenities.
URA Master Plan for the Area.
Investment in Infrastructure.
Unit orientation and Views.
Design & Architectural Style.
The intricacies of these factors will be discussed in a separate article.
So, what do all these intrinsic determinants of property market translate to a buyer or an investor?
Crucially, we need to understand them to get the right strategy and to ascertain the best buy for our housing objectives or property investment portfolio.
Moreover, we need to note that it takes only one macro factor to go astray for the whole property market to be adversely affected in the short term.
However, the market will always turn around at some time. This had been proven many times in Singapore property market.
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I am a Real Estate professional with proven records and 10 years’ experience in helping clients to acquire their dream homes and fulfilling their property investment goals. Skilled in facilitating purchase, sale and leasing of commercial, industrial, private residential and HDB properties, I enjoy my interactions with clients and find joys and sense of fulfillment whenever they found the properties that met their needs or when they benefited from their investments in the properties that I had helped them purchase.