Addressing the pandemic impact & the resilience of Singapore housing market

coronavirus and housing market impact

2020 is a year that the world will never forget. 

A global pandemic named Coronavirus(Covid-19) swept across every continent resulting in the loss of not only human lives, but jobs as well due to the significant impact on financial markets.

Many people will be questioning and wondering how is this going to impact the property market in Singapore. 

In this article, we will address some of the common concerns such as: 

1) Is it a good or bad time to buy now? 

2) Will housing price drop 20-30% during this year? 

3) Will there be a lot of cheap distress sales happening soon? 

4) Is this pandemic a crisis or an opportunity?

Warren Buffett famous quote: “Be fearful when others are greedy and greedy when others are fearful.”

Time and again, the value investor has used this philosophy to pounce on opportunities.

a quote by warren buffett

What is the real estate sentiment now?

  • Recession is coming
  • Possibility of losing job
  • Uncertainty on economic outlook
  • Stock market crash
  • Waiting for property price to crash

The above are some of the common fears and concerns many of us have. It is absolutely normal for us to be feeling this way.

But more often than not people failed to capitalize on opportunities due to emotion. 

Even though property purchase is one of the most important decisions in life, we tend to let our emotions get the better of us, ignoring facts and figures.

Hopefully by the end of this article after reading what I have to share, you will be able to filter out the noises and determine for yourself whether this pandemic is a crisis or an opportunity.

a chart showing the real estate market price in singapore for the past 24 years

Let us take a look at where we currently are in the real estate market (Green Arrow) and the last global financial crisis in 2008 (Blue Box) which is the subprime mortgage crisis caused by the collapse of the investment bank Lehman Brothers.

Why did the property market crash during the 2nd Quarter of 2008 until the 2nd Quarter of 2009?

It is caused by the sudden surge of distressed sellers within a short period of time.

There are mainly 4 reasons that resulted in these property owners turning into distressed sellers when a severe economic crisis hits.

  1. Speculation
  2. Over-Leverage
  3. Over-Commitment
  4. Over-Borrowing

Why is Speculation bad for the housing market?

During an up-trend market, a property owner with multiple properties will be able to service his mortgage loans from his tenanted properties’ rental incomes.

However, in a down-trend market, the same property owner will be unable to rent out his properties and cannot afford to pay his mortgage loans.

This lead to fire sales as these owners hope to dispose of their properties as soon as possible, with transacted prices way below their initial purchased prices.

In a short period of time, it sets off a domino effect resulting in property prices to crash.

When this happens, the bank will trigger a margin call. 

What is a margin call?

A margin call occurs when the property devalues significantly, to the extent that (1) the value of your property falls below your outstanding home loan, or (2) the fall in property value results in your loan exceeding your loan to value ratio (LTV).

Prior to 2009, there weren’t any cooling measures to prevent property buyers from purchasing beyond what they could financially afford. As a result, many buyers over-leveraged, over-committed and over-borrowed. It was a disaster waiting to happen.

Why is Singapore property market resilient?

From 2009 onwards, the Government intervene by introducing a series of cooling measures to ensure a stable and sustainable property market.

These cooling measures were introduced to cool the property market due to the rapid escalation of residential property prices. 

Singapore took less than 2 years to rebound back to its PPI peak in Q2 of 2008.

The PPI (Private Property Index) increased by almost 55% from Q2 of 2009 to Q4 of 2011!

       1. LTV (Loan-To-Value)

To protect property buyers from over-borrowing, the Singapore government has set an LTV limit for bank housing loans.

The LTV limit defines the maximum home loan amount a bank can grant you as a percentage of the property’s market value (i.e. its valuation)

This prevents a property buyer from over-leverage.

     2. ABSD (Additional Buyer’s Stamp Duty)

It is a tax that is levied on top of the BSD (Buyer’s Stamp Duty, a tax that property buyers have to pay when they purchase a property).

If you’re a Singaporean citizen, ABSD applies to you only when you purchase more than one residential property.

This prevents a property buyer from over-commitment. 

     3. TDSR (Total Debt Servicing Ratio)

TDSR refers to the portion of a borrower’s gross monthly income that goes towards repaying the monthly debt obligations, including the loan being applied for.

A borrower’s TDSR must be less than or equal to 60%.

This prevents a property buyer from over-borrowing.

All of the above cooling measures will prevent the reasons that created the property market crash during Q2 of 2008 to Q2 of 2009 caused by the distressed sellers.

     4. A Healthy Ratio Of Owner-Occupied Property

According to the annual stress-testing by MAS, the results indicate that households’ MSR (Mortgage Servicing Ratios) would remain manageable under ‘stressed’ situations. Under a severe stress scenario of a 10% fall in income, on top of a 250 basis points increase in mortgage rates, the MSR for the median household remains below 60%.

a table showing the non-performing housing loans of singapore in 2019

The asset quality of housing loans remains strong, with housing loan NPL (Nonperforming Loan)* ratio at around 0.4% in 2019, broadly unchanged from a year ago.

*A NPL is a loan in which the borrower is default and hasn’t made any scheduled payments of principal or interest for some time

      5. Defer Home Loan Payment

MAS announced a special relief that allows banks and insurers to defer repayment of the principal or both principal and interest until 31 Dec 2020 to help individuals who are facing cash flow difficulties during this COVID-19 pandemic period.

      6. Cooling & Easing Measures

Singapore Government will introduce cooling or easing measures whenever necessary to promote a stable and sustainable property market.

The Government rolled out eight rounds of policy tightening for the housing market as home prices surged 62 per cent between 2009 and 2013. 

When home prices fell from Q4 of 2013 onwards, the Government introduced an easing measure in March 2017 by revising the SSD (Seller’s Stamp Duty),  reducing the holding period to 3 years instead of 4 years.

This resulted in home prices to increase by almost 10% from Q2 of 2017 until Q3 of 2018 before the latest round of cooling measure was introduced in July 2018 to curb the rapid growth.

Where are the opportunities?

a quote by mark twain

To quote Mark Twain: “History doesn’t repeat itself, but it often rhymes.”

In my own interpretation, it means that past performance doesn’t indicate future results, but we can understand human behaviours from it.

Why is understanding human behaviours important?

In a nutshell, it can be said that the performance of financial markets is a reflection of human emotions.

Emotions like fear, anticipation and greed constantly shape our decisions.

a chart showing singapore's quarterly gdp growthSource: MAS

a chart showing the number of monthly international visitors to singapore from 1978 to 2008

Source: Business Times, 21 March 2020

During the 2003 SARs period, Singapore took a heavy toll on the domestic economy and the number of international visitors. 

After the SARs epidemic ended, both the domestic economy and the number of international visitors rebound back in a V-shaped recovery.

Will this happen in Singapore?

cna newspaper article about revenge spending in china

Source: CNA

scmp newspaper article about china homebuyers revenge spending

Source: SCMP, 28 April 2020

A property buying fever has gripped mainland Chinese homebuyers, who are indulging in some “revenge spending” on property as coronavirus lockdowns are lifted in major cities across the country.

All 160 units at a newly launched luxury project in Shanghai, selling for 17 million yuan (US$2.4 million) to 78 million yuan, were snapped up in a day. The lucky few who got to buy these homes were drawn from a pool of about 500 applicants, who had to queue up last week and deposit 6 million yuan for just a chance to buy the flats.

“The demand was only deferred by the lockdowns and did not disappear.”

Why are some people still buying?

edgeprop article about opportunistic buyers snap up deals amid circuit breaker lull

“Buyers are still looking for good value propositions in the property market, despite the pandemic and economic uncertainties. Many investors are taking a long-term view and stepping into the market, especially when they see that entry prices are attractive,”

a chart showing the ubs global real estate bubble index 2019

In UBS global real estate bubble index 2019 report, Singapore’s index score is 0.45, which is fair-valued.

The report also mentioned that affordability remains a key risk. Affordability has worsened the most in Hong Kong and London and improved the most in Singapore.

morgan stanley research report predicting singapore's home prices in 2030

According to a Morgan Stanley Research report, Singapore property price will double by 2030.

Forecast of home prices:

  • Base case: home prices will double by 2030
  • Bull case: home prices will grow 126% by 2030
  • Bear case: home prices will grow 73% by 2030, but will double by 2034

Mortgage Rate Cuts

a graph showing singapore's sibor rates

Source: https://www.icompareloan.com/sibor

a table showing mortgage savings

Many buyers fail to realise that the mortgage rate cut is a discount by itself. 

Where is the risk?

 

a chart showing singapore's property market cooling measures

This is a chart that shows the effect of easing and cooling measures on home prices. A green dot represents an easing measure and a red dot represents a cooling measure.

a chart showing singapore's property market cooling and easing measures

excerpt from todayonline newspaper article

Source: Today newspaper, 15 November, 2018

The Government has emphasized that it will not take a “hands-off” approach to Singapore’s property.

The graph above clearly shows the effect of housing policy on property price. 

Whenever the property market is getting too hot, a cooling measure will be introduced. But when the property market is falling, an easing measure is then introduced.

The Government aims to have a steady and sustained property market, moving broadly in line with income growth. 

So, if Singapore’s property market were to crash, what do you think the Government will do?

Is Singapore property price undervalued or overvalued?

a chart showing singapore's property cycle and gdp growth

Since TDSR was introduced in June 2013, URA PPI has lagged behind GDP (Gross Domestic Product) growth by 31%.

a chart showing singapore's household networth and property price index

In the past 10 years from Q4 of 2009, our household net worth has increased by 93% but URA PPI has only increased by 29%.

a graph showing singapore's median household income and property price index

In the past 10 years from Q4 of 2009, our median household income increased by 56% but URA PPI has only increased by 29%.

gdp, household networth and median household income compared with property price index

After these comparisons, you can decide for yourself if Singapore property price is undervalued or overvalued.

Quantitative Easing 

  • Quantitative easing is when a central bank purchases bank assets to increase liquidity in the financial market 
  • The U.S. Federal Reserve buys mortgage-backed securities and Treasury from banks by issuing credit. In effect, QE increases money supply, encourage lending and investment
  • It was successful as an economic stimulus following the 2008 financial crisis

a picture showing quantitative easing numbers

3 rounds of quantitative easing amounting to a total of US$4 trillion new money was injected into the economy to stimulate economic growth.

However, as a result of the increased money supply comes inflation, and the value of money goes down.

a picture showing money supply from quantitative easing flowing into different countries

Capital will always flow to places that are able to provide a safe and secure environment with high yield returns.

With more money supply, the value of money becomes smaller. Therefore, many investors chose to transfer their money into assets in order to preserve value.

a chart showing singapore's money supply and asset inflation

QE 2020 (QE Infinity)

new york times newspaper article about quantitative easing

Source: The New York Times, March 23, 2020

The U.S. Federal Reserve goes all-in with this new, unlimited bond-buying plan. 

In the week through April 15, it expanded its balance sheet at a pace of about $41 billion per day. And it is not alone.

Central banks in Group of Seven countries purchased $1.4 trillion of financial assets in March, nearly five times as much as the previous monthly record set in April 2009,  according to a Bloomberg Economics analysis. 

Morgan Stanley analysts estimate that the Federal Reserve, European Central Bank, Bank of Japan and Bank of England will expand their balance sheets by a cumulative $6.8 trillion when all is said and done.

a picture showing wave of money flooding singapore

With all these new money supply that is set to be flowing into Singapore, what do you think will happen to our property price?

What if I missed the current buyer’s market?

a picture showing the possibilities of what if i missed the current buyer's market

a picture showing the increased price of a higher floor unit

One common scenario is the example shown above. You found a unit you like and waited. 6 months later that unit was sold and the next suitable unit is of a higher floor. Higher floor units are priced higher. Eventually, you might end up paying more.

Conclusion

This pandemic is going to end one day, it will not last forever.

As with all past crisis, every crisis seems to be the worst ever when it happened. But time and time again history has proven that we always bounce back stronger.

Other than the short term negative news and noises, nothing has changed.

Singapore is expanding infrastructure and increasing population, the fundamentals and foundation are still strong.

Remember to always do your research based on facts and figures or speak to a professional real estate consultant.

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