SINGAPORE (EDGEPROP) - Trade recovery has returned to pre-pandemic levels, and the economy is entering into a new growth cycle, says Song Seng Wun, director of CIMB Private Banking at the webinar “Residential Market Outlook” on March 20, organised by EdgeProp Singapore and sponsored by M+S. Song believes that the outlook for the economy and the property market is “very positive”, although sector contributions could be uneven.
“The pandemic started at a very mature growth cycle. We already saw growth slowing down at the end of 2019 and at the start of 2020. We were wondering what could trigger a recession, and in the end, it was a pandemic,” Song says.
Despite the recession, Singapore is still a safe and attractive place for investments and new companies to set up shop, says Song. This is in part thanks to the measures that the government has undertaken.
In fact, he points out that last year, there were more companies being set up even though there was a severe recession. “Changes in behaviour in the household and office, coupled with government incentives and precautionary measures, have led to new opportunities,” Song adds.
“This is the first recession where we see the government rolling out measures right from the start, which managed to keep retrenchments to a minimum. Therefore, property prices essentially held stable and stayed in line with economic fundamentals,” Song observes. He referenced data showing that nominal GDP fell 8.2% in 2020, reaching a four-year low, while household debts fell 1.7% in the same year. The GDP shrank more than household debt because governments provided support and helped households survive.
Fellow panellist Alan Cheong, executive director at Savills Singapore, predicts that property prices will increase faster than GDP in 2021. He notes that new residential sales increased 0.7% y-o-y in 2020, even as GDP decreased 5.8% y-o-y.
Read more: Economic rebound in 2021 expected to lift some property sectors
Additionally, overall private property prices rose 2.1% y-o-y, with prices in the Core Central Region (CCR) falling 0.05% while those in the Rest of Central Region (RCR) and Outside Central Region(OCR) rose 1.18% and 0.8% respectively.
In terms of demographics, Cheong says that there is a misconception that more foreigners buy properties in the CCR. Data has shown that 78% of new sale buyers in Districts 9 and 10 are Singaporeans. In these districts, the median quantum is around $1.8 million. In Districts 1, 2 and 7, where new sales are transacting at a median quantum at $1.38 million, 83% are purchased by Singaporeans.
“The quantum of $1.3 million to $1.6 million is within the range of Singaporeans seeking private properties. You can sense that these districts are what Singaporeans have been eyeing,” says Cheong.
He also notes that smaller units, from studios to one- and two-bedrooms, have been the fastest-moving units at projects within the three districts, such as The Reef at King’s Dock, One Pearl Bank and Landmark.
Cheong asserts that there are a few misconceptions about what drove the private residential property market in 2020. He says that minor changes in GDP, interest rates, unemployment rate, and price increases — as proxied by the URA Property Price Index (PPI) — did not impact developer sales for the period 2000 to 2020, as much as the number of launches. This is because such variables are significant only when they increase or decrease excessively.
Cheong: Minor changes in GDP, mortgage rates, unemployment rate, and property price increases did not impact developer sales for the period 2000 to 2020, as much as the number of launches (Chart: Savills Singapore)
“What really drove the market were land-banking activities in the preceding 15 to 18 months,” he adds.
Nonetheless, Cheong observes that property prices are tracking GDP well within a tracking error of 6.9%, which shows that cooling measures have done their job over the past 20 years. With liquidity in the background, households can still afford to buy private properties.
In an interlinked world, Cheong also notes that Singaporeans are investing overseas on their own accord, which is a trend that is not correlated with GDP. “Singaporeans are looking further afield into Nasdaq and investing in things like Bitcoin,” he adds.
While property prices are on the uptrend, Cheong mentions in the webinar’s Q&A segment that the market is still very price-sensitive. “If a developer tries to price their property 10% higher than market rate, sales during the first weekend launch won’t move quickly,” he adds.
The number of Singaporean residents aged 50 to 69 who are living in private properties have increased from around 82,000 to 221,000 over the past 20 years, observes Savills’ Cheong. “This demographics will drive demand in the future because when older people downgrade from private properties to lower-priced properties or HDB resale flats, they will free up capital,” he adds.
Cheong: When older people downgrade from private properties to lower-priced properties or HDB resale flats, they will free up capital for their children (Chart: Savills Singapore)
“Parents of this generation who own private properties have a tendency to disburse capital gains to their children, which number at two kids on average. From the sale of one such downgrader, it spawns demand for two private properties, even though the sizes may be smaller,” says Cheong.
The number of people aged 50 to 69 will increase throughout the next 10 years, according to population statistics. Affluent downgraders have “the weight of money in their favour”, and may drive up HDB resale prices, says Cheong.
Other immediate factors that drive up HDB resale demand include the increase in new citizens and permanent residents (PRs), and more Singaporeans returning home to put down roots after working overseas. The delay in handover dates for HDB Build-To-Order (BTO) units might also prompt Singaporeans to bypass the BTO market to purchase resale flats.
Cheong adds that the property market is fragmenting, with younger millennials living a different lifestyle from the older generation. Some may prefer to rent and purchase homes later in life as they are also marrying later. At that point, their higher incomes may not qualify them for HDB BTO properties. This could cause a preference for private properties, he suggests.
Savills’ Cheong also notes that there are behavioural aspects that inform home buyers’ decisions, which might impact the property market more than pure economic factors.
“The economy has been restructured many times. After each crisis, the government will form a committee to recommend which direction Singapore should go. Inadvertently, this creates a lot of uncertainty, as people feel that they cannot keep up. There is a subconscious fear among Singaporeans of whether they can survive, or how their children will survive,” says Cheong. When people feel uncertain about the future, they will tend to buy properties, sometimes on behalf of their children.
Cheong also postulates that remote lifestyles due to the proliferation of video-conferencing, which has resulted due to Covid-19 lockdown measures, may have led to psychosomatic disorders, leading to compulsive buying.
“There is a new kid on the block for floating interest rates and that is Sora,” says Clive Chng, associate director, Redbrick Mortgage Advisory at the webinar. Sora, which stands for Singapore Overnight Rate Average, is the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank Singapore-dollar cash market in Singapore between 8am and 6.15pm and computed based on actual transactions.
“Moving into 2021, what we can see is that there would be a shift of benchmark interest rates from Sibor to Sora,” says Chng, adding that there are four banks in the market at this point of time that are offering Sora-pegged rates. Monetary Authority of Singapore (MAS) will be phasing out Sibor rates by 2024, based on recommendations by the Association of Banks in Singapore. Currently, rates are at 1.2% for Sora-pegged mortgages.
The preference for certain mortgage types has changed over the past five years. From 2016 to 2017, the market gravitated towards fixed-deposit pegged rates, which are pegged to the banks’ fixed deposit accounts. “They were not as volatile and also priced more competitively than fixed rates,” says Chng.
However, in 2018, fixed-deposit rates rose, and after four interest rate increases, people gravitated to fixed interest rates. In 1Q2019, more consumers moved towards Sibor-pegged rates, which were lower than fixed interest rates.
Chng: In 2020, there was a convergence of fixed interest rates in the market and floating interest rates, which led borrowers to primarily go for fixed interest rates (Chart: Redbrick Mortgage Advisory)
At the same time, the property market was going through an en bloc fever. “People who became overnight millionaires recycled capital into the market. Fixed interest rates climbed, from 2.6% to 2.88%,” says Chng. “Naturally, as a consumer you’ll think that interest rates will only climb higher, so it’s best to secure fixed interest rates before they start climbing again.”
Then, Sibor rates also looked attractive again as they were much lower at 2.1% to 2.2%. But when Sibor gained recognition in 2019, sitting at 2.1% to 2.2%, the gap between fixed interest rates and Sibor rates grew bigger. “The margins for Sibor rates are low for the banks, so they adjusted fixed interest rates down in April 2019. So, towards the end of 2019, we saw a pick-up in fixed rates again,” says Chng.
In 2020, there was a convergence of fixed interest rates in the market and floating interest rates, notes Chng, which led borrowers to primarily go for fixed interest rates. Chng believes that this preference will continue through 2021 and interest rates will stay generally subdued.
Clockwise from top left: Timothy Tay, senior writer at EdgeProp Singapore; Song Seng Wun, director of CIMB Private Banking; Alan Cheong, executive director at Savills Singapore; and Clive Chng, associate director at Redbrick Mortgage Advisory (Photo: The Edge Singapore)
Chng also notes some new trends, for instance, borrowers are extending their loan tenures to get better cash flow. Additionally, increasingly savvy private property owners are taking out equity term loans to recycle capital at a low rate. “If you have a property with a value of $2 million, you can take out an equity loan of up to $800,000 at a low interest rate of 1.15%,” adds Chng.
However, whether or not low interest rates will prompt people to buy, Chng says that it may not be a significant factor. “Home buyers are happy that interest rates are low, but whether it will move sales depends on the product and sentiment of the market,” he adds.
CIMB’s Song adds: “The reason why interest rates don’t matter as much is that people are gainfully employed, given that Singapore’s unemployment rate has remained stable. If one has clarity and confidence about his job, then whether the mortgage rate is 1% or 2%, it is fine.”