This article is part 3 of a 3-part series to understand if the upcoming supply of new condos will cause prices to collapse. On the surface, this topic seems like a no-brainer. How can prices of a commodity go up when there is so many of them available? However, if you were to scrutinize the situation, you will realise that things might be a little more complicated than that. The complexity behind how certain factors affect the real estate market is the main reason I came up with this 3-part series. To get started, I suggest you read part 1 and part 2 first. In part 3, I will be writing more on the government’s cooling measure and its effects on the property cycle.
Why It Is Not Possible to Predict Singapore’s Real Estate Market
Now and then, there will always be some analyst who will come out and try to predict the Singapore real estate market. The foundation of their analysis can be traced to Homer Hoyt, an American economist who studied the land prices of Chicago over 100 years. Homer Hoyt discovered that the effects of sudden demand coupled with the delayed supply of housing could result in a pattern of boom, bust and recovery. Or what is commonly known today as the property cycle.
Does History Always Repeat Itself? Why Analysts May Not Always Be Right.
Most people think that history tends to repeat itself. Whatever goes up must come down. Everything, in the end, must go full circle. Therefore, by understanding which part of the cycle we are in, it would be possible to predict where the property market will be heading. One of these analysts is Jesse Colombo, an economic analyst who successfully predicted the 2008 global financial crash. Back in 2014, he made another prediction by writing this interesting piece on Forbes.
In this article, he highlighted that “Singapore Has an Epic Residential Property Bubble” due to a few reasons. Firstly, the interest rate is incredibly low resulting in the increase for the demand for housing as a means for better capital returns. Secondly, the property price index has gone up significantly within a short time frame. Thirdly, Singapore’s household debt is also one of the highest in Asia. With these three elements in place, you would think we are likely at the tier end of the property cycle back in 2014 and prices will collapse very soon. However, Jesse Colombo couldn’t predict one thing. And that is Singapore’s government intervention of the property market. With the introduction of several measures to influence the supply and demand curve of the property market, the asset bubble didn’t materialise.
Mechanisms of How Cooling Measures on the Supply and Demand Curve
If you are not aware by now, there are few measures implemented by the government to prevent the formation of an asset bubble. All of which target specific areas of the supply and demand curve. Here’s my analysis on these measures and what they do.
The first ASBD was introduced back in 7th December 2011 as an extra tax to be paid on top of the buyer’s stamp duty whenever you acquire private residential property in Singapore. The ASBD was then subsequently adjusted upwards in 2013 with the latest revision in 2018. The ABSD a progressive tax where it does the following
-Foreigners and companies are taxed significantly higher than Singaporeans or PRs. In addition to differentiating between the benefits a Singaporean has over a foreigner, its main objective is to curb funds outside Singapore from flooding into the private residential market. Assuming you are a PR or foreigner who has acquired a private property recently, the holding period to breakeven can range from 5 years to 15 years*. With that in mind, it is safe to assume that foreigners are acquiring these properties for their consumption and not as an instrument to flip it later for monetary gains.
*Assumption. ABSD 20%. BSD 4%. Selling Cost 2%. Rental Yield of 2%
-Singaporeans who acquire another private property for investment are also taxed significantly. The objective is very similar to that of the PRs and foreigners. The idea is to make sure that you need to hold on to the property for an extended period. Or put your funds into other investments instead of competing with those who are purchasing a private home for the first time!
Considered one of the most effective cooling measures, the TDSR is an affordability test to ensure that those who enter the property market can sustain their mortgage payments. If you think about it, the only way you can acquire cheap properties at below market value is that someone else sells it to you at that price. However, if everyone can afford to service their mortgage payments and hold on to the price. There isn’t a reason for them to sell the property dirt cheap. If no one sells their property cheap, how can prices collapse?
The seller’s stamp duty is a tax that penalises a seller depending on when they sell after acquiring the property. The main objective is to control the total volume of transactions within a said timeframe. In part 1, I have shown you how the price of a condo in River Valley doubled within two years. For that to happen, you would need a significant volume of transactions (aka flipping or subsale) for prices to climb. After all, nobody in the right mind will pay you $1.1mil for something you paid $538k. In addition to controlling volume, sellers are also disincentivised from disposing their units all at the same time. Thereby preventing a massive supply dump in the secondary market.
Will the Upcoming Oversupply of New Condos Cause Prices to Collapse?
After reading this 3-part series, I believe you now have a better understanding of what causes prices to fall. To determine where prices are heading, it is essential to ask yourself these three questions.
– Is there currently an asset bubble?
-Are people able to hold on to their properties? Is there a possibility that they will sell it cheap?
-Is the market ready to absorb the current prices? And which unit types out there have more inelastic demand?
By figuring out the answers, you would have a clearer state of mind on the status of the private residential property market in Singapore. I always believe in educating my clients so that they can make better-informed decisions when it comes to Singapore’s real estate market. This education is the reason why it is possible to profit from the real estate market at any entry point during the last ten years.
What Is the Morale of This 3 Part Series?
Of course, the morale of the story is that nobody can predict the future. It doesn’t matter if you are a YouTube content creator, an economic analyst or even a famous newspaper that predicted that prices would double in 2030. If someone tells you that certain things are going to happen in the future, take it with a pinch of salt. Try to understand their research and how they came up with the answer. After all, as I always say, choosing the correct product type is far more critical than when you enter the market.
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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