Singapore's property prices slip

After a four-year rally, house prices in Singapore slipped in the third quarter of 2008.

The residential price index dropped q-o-q by 1.8% during the 3rd quarter, the first time since March 2004 that house prices have fallen. Although prices are up 8.9% y-o-y, price rises have dramatically slowed from the 31.2% y-o-y price increase in 2007.

After a devastating price dive after the 1997 Asian Crisis, property prices started to rise in 2005, but only really took off in 2007. Singapore’s residential property price index rose by 23.6% (20.9% in real terms) in 2007, after 2006’s 7.15% rise (6.1% in real terms). Property prices in prime districts rose considerably more.

Policies implemented in 2005 significantly boosted the housing market:

• The relaxation on foreign ownership of apartments
• An increase of the maximum loan-to-value ratio from 80% to 90%
• A reduction of cash down payments from 10% to 5% for home purchase
• Allowing non-related singles to use their Central Provident Fund (CPF, a social security pension scheme) to jointly purchase residential properties.

Alas, the housing market is now being dragged down by the surge in inflation and by the global financial crisis. Singapore is a regional financial center and layoffs by global financial institutions have a major impact on the country.

Transaction volumes have fallen sharply. Vacancy rates have inched upward. Both buyers and sellers are cautious.

Housing policy

A major goal of Singapore’s government is to promote home-ownership. The government, through the Housing and Development Board (HDB), Urban Redevelopment Board (URB), Monetary Authority of Singapore (MAS) and the CPF, has been able to increase home ownership from 27% in 1970 to its present level of around 91%.

Singapore had serious housing shortages after independence. In 1960 the HDB was created, and over the years 80% to 90% of Singaporeans came to live in HDB flats.

Rapid economic growth and the immense demand for housing led to rapid increases in house prices in the 1980s to 1990s. From 1986 to 1996, there was a 440% increase in the private residential price index.

In 1993, the housing financing policy for resale HDB flats was liberalized, as part of government moves to curb property speculation. Flats were allowed to be financed based on market prices and not HDB-listed prices that were substantially lower. In response, the number of flats available to the private sector jumped from 78,012, to 129,106 in 1995.

The increased supply, plus the intense campaign against speculation, combined with the effects of the Asian crisis, led to a 45% fall in prices in just two years (1996-1998). The housing market slightly recovered between 1998 and 2000, but global events soon plunged it back into crisis.

After the reforms of 2005, the property market rallied again, until global events in 2008 halted the boom.

Mortgage market

The Central Provident Fund (CPF), Singapore’s mandatory social security savings program, has been at the centre of the homeownership campaign. CPF contributions can be withdrawn, among other things, to purchase housing.

From 2002 to 2006, housing purchases accounted for around 55% to 60% of CPF withdrawals. Around 50% of the SG$11.562 (US$7.8) billion withdrawn from the CPF in 2007 was used for housing purchases. Of this, SG$4.679 (US$3.17) billion was spent on public housing purchases, and SG$1.189 billion (US$806 million) to buy other housing units.

Singapore’s mortgage market is one of the most developed in Asia. Outstanding housing loans were around SG$73.14 (US$49.6) billion in 2007, or approximately 32.8% of GDP.

Interest rates are relatively stable in Singapore, as monetary policy is implemented through the exchange rate, i.e. the foreign exchange rate is used to adjust economic growth and inflation. The interest rate on housing loans has been at 5.56% since March 2008, down from 5.73% imposed from June 2006 to Feb 2008. Low and stable interest rates have provided security for borrowers, even though variable interest rate mortgages dominate the market.

Small rental sector

Rent increases have typically lagged property price changes in Singapore, leading to low yields. For instance, residential prices rose almost 100% between 1990 and 1996, but rents rose by only 52%.

However in the most recent boom, the sudden influx of expatriates led to rents to rise faster than property prices. From Q2 2004 to 2008, the residential rental index rose by 82% while the price index rose by only 58%.

Nevertheless, rental yields have remained relatively low. Global Property Guide research shows that rental returns range from 2.7% to 4.2%, with smaller units earning higher yields.

With the most successful home-ownership program in the world, the rental sector in Singapore is very small, mostly serving expatriates. The local private rental sector is much smaller, because the HDB still owns about 81% of all rental units.

Most expat-compatible apartments are located in buildings with amenities such as pools, tennis courts, and a gym. There were 10,430 executive condominiums sized between 800 to 2,000 sq. m., as of second quarter of 2008. The vacancy rate was 3.9% in Q2 2008, up from historic low of 0.8% in Q3 2007.

Foreign buyers

According to an analysis of private residential transactions by DTZ, foreigners bought 6,536 non-landed homes from the secondary market in 2007, perhaps accounting for more than 50% of secondary market transactions – a record.

Singapore has experienced an influx of expatriates, and some foreigners have preferred to buy rather than face escalating rentals, especially if they are going to be in Singapore for more than a couple of years. Rents of prime apartments and condominiums increased 45% year-on-year in 2007, according to DTZ figures.

Indonesians and Malaysians are the biggest foreign buyers, accounting for 23% and 17% of all foreign buyers in 2007 respectively, but Indians (12%), Britons (8%), Chinese (7%) and Koreans (7%) are also well represented.

Economic recession

Strong economic growth boosted the housing market in the past; with 7.7% GDP growth in 2007, following 7.9% in 2006, 6.4% in 2005 and 8.7% in 2004. However, the sudden spike in food and fuel prices in the first half of 2008 halted Singapore’s economic growth.

Inflation soared from an average of 2.09% in 2007 to around 7.5% from April to June 2008, the highest in 26 years. Although inflation eased to 6.4% in Aug 2008, it was still way beyond the government’s target.

The global financial crisis has seriously hit Singapore’s export-dependent economy. By the third quarter of 2008, the economy was officially in recession, with GDP contracting by 6.3% in an annualised seasonally adjusted quarter-on-quarter basis, following a 5.7% fall in the second quarter. Overall economic growth for 2008 is expected to be around 3%.

In response, the Monetary Authority of Singapore (MAS) shifted its foreign exchange policy from “modest and gradual appreciation” to “zero percent appreciation.” The monetary authorities said that the move was intended to boost competitiveness and economic growth.

However, the authorities are in a dilemma. Keeping the exchange rate at its current level implies that inflation will be allowed to remain high. Either way, the economy is set to weaken, and house prices can be expected to fall further.