As the world struggles with the coronavirus outbreak, one thing is sure. This invisible enemy does not distinguish between language, race or even social class. The virus has no respect for countries and borders and has now spread around the world. The damage it as done to families, economies, and the stock market is tremendous. With a stock market in freefall at an estimated current loss of 21 trillion dollars, what will happen to the property market?
Will The Stock Market Crash Affect The Property Market?
A lot of people think that after the stock market crash, the property market will inevitably follow. Yes, what happens to the stock market will indeed affect the property market to a certain extent. However, I do believe it is much more important to understand the mechanisms of how prices fall. In my earlier 3-part series, I have covered the effects of prices from the supply angle. In this article, I will be covering the impact of demand on housing prices. Because at the end of the day, prices will only follow one theory, and that is the economics of supply and demand.
Why Did The Stock Market Crash?
We have witnessed the first-hand effects of the virus on the stock market. Why was there panic selling, and why did prices crash? First, you must understand what a stock is. A stock or share of a company is essentially ownership of the company. How valuable the share price of a company is directly proportional to the profitability of that company. If a company is highly profitable, it also means that more people would want to own a stake in that company. For example, ten years ago, Apple shares were available at less than $30. Although the recent market collapse has shaved off about 30% off its peak value, it is still trading at a price above $200. And this is not even taking stock splits into account.
However, the converse is also true. If a company cannot turn a profit and keep suffering losses, it would also mean that that company has no value at all. Once the company goes out of business, whatever stocks you own are now worthless. With a worth that is only dependent on profitability, it is no wonder that some people have decided to liquidate whatever ownership they have in a company now. Once you have a collective number of these shareholders that have lost confidence, they will start to panic sell, and prices will fall.
Mechanisms That Affect Property Prices
Now that we have a better understanding of the value of a stock. Let’s take a closer look at how we determine the value of a property. Unlike stocks and shares, the property is a commodity that can be used. Real estate is essentially a piece of land with four walls and a roof. The interesting fact is that the prices of these four walls vary significantly throughout the world. The final price is an accumulation of both qualitative and quantitative factors. Qualitative characteristics include things like location, facilities, schools, nearby amenities, government policies, etc. While quantitative factors involve rental yields and floor levels. In some instances, it is even possible to quantify unit facings.
Due to the intertwined nature of these two qualities, the only way to measure real market value is dependent on just one thing.
“How much a buyer is willing to pay for the property.”
This reasoning is why banks and valuers will always refer to the nearby and recent transactions to determine the market value. This same reasoning is also why Singapore properties have continued to appreciate over the years. The increase in demand comes in many forms such as higher median incomes, a multi-cultural society, low crime rate, excellent public transportation, etc. All these factors play a role which makes Singapore properties attractive. Think of it as a brand that buyers are willing to pay a higher price compared with the same product in another country.
What Affects Housing Demand In Singapore?
Now that you have a better understanding of what affect prices for the stock and housing market. The question you must ask yourself is this. Which elements are crucial that will ultimately affect demand for Singapore properties?
-Are units continuing to sell today?
-Rental prices. Are they increasing or decreasing?
-Interest rates (costs of ownership). Is it increasing or decreasing?
-Is unemployment increasing? Can people afford to hold on to their properties or they must sell them cheap?
By answering these questions, you would have a better idea of where the market is heading and how to react accordingly. This Coronavirus has just proven Singapore’s capability to the world. We are a tiny nation without any natural resources and one of the earliest countries to be affected by the virus. Yet, strong governance has reduced the spread of the virus in the local community. Measures are always fine-tuned and even stimulus packages are given to businesses affected by the economic fallout. As a result, residents here are still able to carry on their lives. We continue to have food, water and even toilet paper.
Let’s assume that you are an investor looking to purchase your next piece of real estate. You want to find a country that is safe, resilient with a strong currency. You want your investment to retain value and grow in the next 10 to 20 years. Which country will you think of first?
Article contributed by Jerry Wong
Jerry Wong is a realtor with Propnex Realty. He loves coffee, cookies and condos. Most importantly, he loves connecting people to properties and gets enormous satisfaction when they acquire their dream home. Or making well-informed decisions that see their assets grow. Buy Jerry a coffee, and he will meet up with you on a 1 to 1 session to share the following
- How certain factors affect real estate prices. Why some condos can make a million dollars while others can lose that same million.
- Why timing is not the most important thing. Because some people can buy the same condo at the same time, but one end up making $100k to $200k while the other suffers losses of the same amount!
- Understanding your requirements and craft a solution for your real estate needs. Be it in the form of asset progression, tax planning, etc.
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