Why People are Buying Singapore Properties Despite Rising Prices and Interest Rates

Did you know that Singapore Property Price Index has risen by 18% since 2020? That’s right. Property prices and interest rates are rapidly growing in Singapore. In fact, since June 2020, HDB has grown by 23% while non-landed private condominiums grew by 18%. And the worst part? There are no signs of it slowing down.

And yet, people still continue to flock to the property market scene in Singapore. To some of you, it might seem like a strange phenomenon to purchase properties when the prices are growing, but I assure you there is a very good reason (or many reasons in fact) for it! So, if you are curious as to why people do so, continue reading this article!


Why are HDB prices consistently increasing?

PPI of HDB public housing of Singapore
Property Price Index of HDB Resale Flats

Before we dive further into the various reasons, let us first understand why is HDB prices are consistently increasing. Unfortunately, the rapid rate of price growth of HDB resale flats is due to a combination of a few factors.

Firstly, who could leave out the COVID-19 pandemic? Not only has it caused supply chain disruption and lock-downs, but it also led to shortages of materials and manpower in the local construction industry. All these contributed to the higher HDB prices. 

In fact, the COVID-19 pandemic has also caused the construction of HDB flats to be disrupted and delayed. Previously, most applicants of HDB (BTO) flats would expect to receive the keys to their new flats about three to four years after they applied for their flats. Now, the pandemic has extended the wait for BTO flats to beyond 4-5 years! With this increase in the wait time for BTO flats, it’s no wonder HDB homebuyers (especially those who can’t afford to wait) are turning to the resale market for completed HDB flats instead.

Essentially, the demand for resale flats has greatly increased during this pandemic. In fact, about 31,000 HDB resale flats exchanged hands last year, which was 25.3% more than the number of resale flats transacted in 2020. But why exactly do prices increase with the rising demand for resale HDB flats? It is because the stock of available resale HDB flats is limited in the short term, thus, prices will increase.


Why are condo prices consistently increasing?

Property Price Index Over Last 3 Years Since 2019
Property Price Index Over Last 3 Years Since 2019

What about condominiums then? Why are their prices increasing over the years? Apart from the increasing cost of materials and manpower, it is mainly due to the “spillover effect”. This “spillover effect” happens when sellers who sell their HDB need to buy a property, but due to the delayed HDB construction and limited resale HDB flats, they turn to the private condominium market instead. What that means is the “spillover effect” causes the demand for private properties to greatly increase. 

In fact, the increase in pricing since the pandemic culminated to an 18% growth from April 2020 to July 2022, a continuous 23 months consistent increase. HDB, on the other hand, grew by 23% over the same period.


Increasing interest rates

Bank SORA rate vs PPI
Rising Interest Rate does not affect Home Price Growth

In addition to rising property prices, interest rates for properties are also growing in Singapore. To understand this phenomenon in Singapore’s property market, let’s put things in perspective by identifying what happens during an economic crisis.

During a recession, businesses and consumers stop spending, hence money also stops flowing. In order to encourage businesses to spend more and get the money flowing again, the federal bank will decrease the interest rate to near zero – i.e., a low-interest rate.

At the same time, the government will also spend more on construction projects so as to stimulate the economy. This is called the multiplier effect which will cause other businesses to spend like the construction and banking industry.

What about right now? Currently, we are not going through an economic crisis, rather, we are experiencing inflation in prices (due to insufficient supplies). As such, the federal bank, in order to curb inflation, has increased interest rates to encourage businesses, banks and concomitantly, consumers to spend less.

Moreover, the US Federal Reserve has increased interest rate this year by 2.25% (27th July 2023) yet 3-month SORA rate (used by Singapore banks) has only increase from 0.194% to 0.995%.

So, why buy property? Reason 1 – Hedge against inflation

Now that we understand why rising property prices and interest rates are increasing in Singapore,  here’s the first reason why people are still purchasing properties in Singapore. It is because they want to hedge against inflation.

In fact, more and more Singaporeans know that it is much better to put your cash in assets (properties) rather than holding on to it during the inflation period. After all, your cash will only be worth less over time during inflation. At the same time, Singaporeans turn to properties rather than stocks and funds to hedge against inflation. This is because with the supply chain disruption, China’s frequent lock-downs and the Russian-Ukraine war, Singaporeans know that it is dangerous to put their money in international stocks and funds. In fact, The New York Stock Exchange has fallen more than 16% this year and bitcoin 250% (from the peak of $70,000 to $20,000 now).

Singaporeans are turning instead to the local property market scene because they know Singapore has a politically stable environment, and there is potential for growth as well. In fact, with Singapore’s limited land size, growing demand for properties in Singapore, and limited release of new lands for sale by the government, these all ensure that property prices in Singapore will continue to grow. Not to mention, the increasing manpower and rising material cost and also demand far outstripping supply will also cause property prices to grow.

So, why buy property? Reason 2 – Unaffected by rising interest rates

Although interest rates are rising in Singapore, it does not affect property buyers. And this is why people are still willing to purchase a new property in Singapore.

MAS Interest Rate and Property
Singapore Housing Interest Rate

Firstly, although interest rates may be on the rise, we are currently at a relatively low interest rate level. After all, the interest rate has been very low below 2% over the last 10 years. Even at our peak 7% interest rate in the past, it is still comparatively lower than other countries with an average interest rate of 8%. Therefore making the local property market so attractive to Singaporeans.

Rental and pricing relationship
Singapore Rental vs Property Pricing

Secondly, property buyers are not affected by interest rates because they pass the cost to the tenants directly. As such, even if interest rates continue to rise, property buyers need not be worried about it because they have passed on the cost to others.

Taken together, the ability to hedge against inflation and the lack of the need to be worried by rising interest rates make people want to purchase properties in Singapore, despite rising property prices and interest rates.

Share the Knowledge!

Leave a Reply

Your email address will not be published. Required fields are marked *