Addressing 5 Major Concerns Singapore Homebuyers have in 2023
As we approach 2023, we do know that many Singaporeans are conflicted. On one hand they need to buy a property to stay or to invest in order to hedge against inflation and yet they are concern with the all-time high property prices, high inflation and a likelihood of recession in 2023.
In this article, I shall be looking at past historical trend and give my own personal opinion on the market outlook for Singapore property in year 2023 and share the 5 major concerns that homebuyers have.
1. Recession
1.1 What is a Recession and What causes them?
A recession is when there are two consecutive quarters of economic negative growth in an economy, measured by Gross Domestic Product (GDP). GDP is the measure for the total output of an economy. It is usually synonymous with retrenchment and unemployment. This is because businesses aren’t making as much money as they need to, so naturally they have to “reduce headcount” to lower their costs of operation.
Recessions are not uncommon but can vary widely in how substantial they can be. Singapore last experienced a recession in early 2020 due to the Covid-19 pandemic and GDP fell by 5.4%.
A recession can be caused by numerous factors. Before the COVID-19 pandemic, the 2008 Lehmann Brothers Financial Crisis caused by the subprime mortgage crisis in the USA led to four quarters of economic decline in Singapore. Prior to that was the dotcom bubble & 9/11 recession, which was triggered in-part by increasing interest rates to combat high inflation. Since the great depression of 1930, a recession has not lasted more than 5 consecutive quarters.
1.2 Is SG Government Doing Anything to Prepare for a Recession?
Although the Singapore Government does not expect a recession, they are still taking several precautions.
Firstly, Singapore is building up its reserve through increase in Goods & Service Tax (GST) and also Property Tax in 2023. With a greater reserve, Singapore are prepared to spend more during recession. This is call the Multiplier Effect to stimulate the economy and help Singapore to recover faster.
1.3 Past Historical Spending
The Singapore Government will be spending on:
- Funding of Skills Training, Upgrading and Development
- Rebates of HDB charges
- Expanding Public Sector Recruitment
- Workfare Income Supplement
- Tax Concessions for Businesses
- Spending on Public Sector, eg Education, Healthcare, Construction & Transport Infrastructure like the Cross Island MRT Line
- Enhanced Sustainable Development Programmes
- Rejuvenating Public Housing Estates
Moreover, other tactics the Government can do is to reduce personal income tax, rebates for property and corporate taxes and reducing cooling measures for more foreign investors.
1.4 Does a Recession Means a Collapse in Property Prices?
| Recession | Date | Duration (months) | GDP Growth (%) |
|---|---|---|---|
| Gulf War Recession | July 1990 - March 1991 | 8 | +6.7 |
| Asian Financial Crisis | July 1997 - Dec 1998 | 18 | -2.2 |
| dot-com/ 9-11 | March 2001 - Nov 2001 | 8 | -1.1 |
| 2008 Global Financial Crisis | Dec 2007 - June 2009 | 18 | +0.1 |
| COVID-19 Recession | Feb 2020-July 2020 | 6 | -12.6 |
If you study the table above on past recession, there is no clear result on how long a recession can be (as recession is just a technical term of 2 consecutive negative GDP growth). Furthermore, GDP growth can also bounce back extremely fast
Comparing with the Singapore Property Price Index, the 2 major drops of more than 10% are the Asia Financial Crisis in 1997 and the Lehmann Brothers Global Financial Crisis in 2008.
Typical market crashes, where house prices fall by more than 10%, have generally been in tandem with deeper economic recessions, having only occurred twice in the last 70 years.
Conclusion: Not all recession causes property prices to fall. Other factors have to be study.
2 Unemployment Rate
2.1 Unemployment from Past Recessions
| Recession | Date | SG Unemployment Rate |
|---|---|---|
| Asia Financial Crisis | July 97 - Dec 98 | 2.5% |
| Dot-com / 9-11 | March 01 - Nov 01 | 2.7% |
| Lehmann Brother Crisis | Dec 07 - June 09 | 2.2% |
| COVID-19 | Feb 2020 | 3.4% |
The 2 market crashes (Asia Financial Crisis ’97, Lehmann Brothers Crisis ’08) are triggered by high unemployment rate of 2.5% and above which in turns causes the economic slow-down. In 2020, Singapore unemployment rate released for Q3 2022 is 3.4%, a decrease of 0.3% from the 3 months prior which saw the lowest rate over three months since 1974.
Hence, an economic crisis is more impactful to the Singapore property market then just a recession.
However, if you look into 2022 Singapore unemployment data, our unemployment rate has fallen to pre-pandemic level of 2%. This is also align with the tight labour market and rising labour cost.
The current market environment is very different to that of past years where parts of the economy are struggling with growth. Singapore is still enjoying low unemployment levels of 2%. Having low unemployment reduces the risk of distress.
In fact, since the COVID-19 pandemic in 2020, there has been 3 cooling measures (16/12/21, 8/5/22, 30/9/22) to cool the hot property market.
2.2 Post TDSR Era
One interesting thing to point out is in 2018, even though unemployment rose, home prices rose as well. This is due to Total Debt Servicing Ratio (TDSR), where the Monetary Association of Singapore (MAS) ensure that anyone who bought a property in Singapore has prudent borrowing and can service their mortgage.
*Check out how much you can borrow with the new interest rate here with our Mortgage Affordability Calculator.
Hence in 2022 with the high interest rate environment, people are still able to finance their property with ease and you do not see any foreclosure.
3 Rising Interest Rates
Following the GFC in 2008, Singapore has enjoyed an era of historically low interest rates which has both positives and negatives. Between 1971 and 2022 the average interest rate (base rate) in Singapore has been 4.1% so in context the current rate of 3% is still attractive. Despite seeing several rises in 2022, Singapore’s base rate is still lower than that of Canada and the U.S at 3.75% and 4% respectively.
Low Risk Level
Furthermore, the number of highly leveraged households in Singapore is now very low following the mortgage review that was undertaken in 2013. The Cap Rate of 3.5% has ensured that every citizen taking a loan will be able to absorb an increase of interest rate to 3.5%. Moreover, banks in 2022 take an additional precaution to increase the Cap Rate to 4.5% to ensure even more prudent borrowing and to prepare for any further cooling measures by the government.
What it means is MAS and banks has ensured that if you take a loan and interest rate were to go up to 4.5% one day, you will still be able to take home 45% of your gross income.
4 Increase in Construction Cost Due to Building & Supply Chain Issues
As the war continues between Ukraine and Russia, energy prices have continued to rise. The increased cost of powering machinery coupled with a shortage of labour and raw materials (such as steel) experiencing significant inflation, has put enormous pressure on construction activities. Cost inflation has reach 7.5% by the end of 2022 (although it was predicted to hit 9.5%).
This has seen many contractors scale back on their development plans resulting in a tightening of the housing supply pipeline. Houses are no longer able to be built for what they were even a mere year prior to today, a strong mitigating factor for significant house price changes.
5 Increase in Property Prices
Unfortunately, I still believe that property prices will still continue to grow in the near future. This is mainly due to a over demand for residential properties.
5.1 More Marriages
After the easing of COVID-19 Pandemic in 2020, total number of marriages grew by 25.1% to 28,329 marriages!
With a waiting period of over 5 years construction timeline for new BTO, newly weds will likely look into the resale market.
5.2 Oversubscription of BTO flats & Delays in Completion
| Location | BTO Date | Overall Application Rate of 4rm |
|---|---|---|
| Jurong West | May 2022 | 7.4 |
| Yishun | May 2022 | 12.2 |
| Bukit Merah | May 2022 | 5.4 |
| Toa Payoh | May 2022 | 10.9 |
| Woodlands | August 2022 | 11.7 |
| Ang Mo Kio | August 2022 | 12.6 |
| Tampines | August 2022 | 22.3 |
Not only for new affordable BTO has long wait time of >5 years, the number of subscription rate is extremely high.
Even in non-mature estates like Yishun or Woodlands, the number of people apply for a BTO is over 10 times! Which means for every 1,000 BTO flats, we got over 11,000 couples applying for the flats. You chance of getting a BTO that you have to wait for > 5 years for construction is less than 10%!
Hence, most people would go for resale instead.
5.3 Fewer MOP Flats Reaching MOP
The total number of HDB flats that will reach the 5 year maturity or MOP will decrease from 30,197 to 15,363 in 2023.
With over 30,000 newly flats entering into the resale market in 2022, we expect prices to stabilise. However, prices shot up over 12% instead which prompted the government to come in with a cooling measure targeting HDB for the very first timing over 10 years.
With fewer supply out there in 2023 and yet currently strong demand from those who can’t get BTOs, there can only be 1 way moving forward; price is going to continue to go up.
These are the 5 major concerns that current Singaporeans have that are worried for 2023, especially those who NEED to buy a house for a roof over their head. Their dilemma is whether to buy a resale HDB or condo or to continue waiting out.
My general advise is to wait and see for the next 3-6 months on the direction where the market is heading. Personally I would NOT recommend you to buy a property for short term of 3-5 years horizon. Currently a property should be more for own stay or to hedge against inflation with a holding period of 5-10 years. At the current high interest rate, it is better to put your investments in other short-term investments like stocks or Treasury Bills where the payout of the interest rate is high.
For a more personalise plan, I have to understand your situation first then I can give a better advise. It is best and most recommended (and possible) to:
- Take a deferred payment scheme – take loan only 4 years later when interest rate is lower
- Buy under-price properties or properties with “Old Price-Tag” of Pre-Pandemic Pricing
- Search for properties with high growth potential or in location with future growth.
- Don’t waste time searching for under-value or foreclosure properties. There isn’t any out there.