Changing Market - How would the Real Estate Market perform?

Experts has analysed the performance of the property market over the last 2 years of Covid19 shutdown and expressed concerns over the high prices in the Singapore property market. Particularly in the luxury property sector especially in CCR and CR region. Did the Singapore property market become a safe haven for overseas investors? Let's explore into more.

You may have heard financial analysts and bankers discussing the upcoming recession from mainstream media and social media outlets. It is understandable why numerous people are getting anxious about the financial market predictions in the upcoming months. The questions that may have been keeping up all night are usually “Is this really happening?” and “Will the Real Estate Market crash?”.

As likely as not, it is not exactly how the way the “doomers” describe it. Not just the US, but governments globally will not overturn all the post-pandemic solutions going back 2 years. Calming down the recession a bit by a regulated recession may have some long-term effects.

We will learn through this article the reason why a recession is most likely to happen, how worse or better it may be from the previous recessions that we have read about in the history books and articles, and its possible effect on the Real Estate Market in Singapore?

Recession Fears. Is the Real Estate Market ready for it?

As we start to bounce back up from Covid-19, is a recession the next one coming?

Whenever we go out, we can already feel the “new normal” that we keep on hearing since 2 years ago when we were all feared by the virus. Back then, we didn’t have a full idea how what the new normal will be exactly like and if we are all ready for it.

World economies are reopening Covid is no longer a major threat. So what would cause a recession? Would it be the Russia-Ukraine conflict or the rise in prices of oil, food, and commodities? Not really. I believe it is the Us Federal government’s way of dealing with the worryingly high inflation rate. What do I mean?

Let’s look at how recessions can be manufactured. Recessions are mostly market downturns, lowered demand for goods, and slowed down company growth. Please understand that growth is directly proportional to inflation. As the economy grows, so does inflation. In the US, recovery efforts put in place by the US FOMC are causing uncontrolled inflation.

The economy is overladen with stimuli handed out and low-interest rates. To create an economic slowdown, the Fed raises interest rates to reduce the supply of money in the system. The balance sheet is then reduced to prevent buying securities and preventing reinvestment when the securities mature. The economy is slowed down mostly by reducing the amount of money circulating in the system.

The recession is another story. Sometimes, a recession is artificially triggered by drastic deflationary measures applied by the Fed. We usually find clues to an upcoming recession by checking the T-Bill Yield Curve Inversions. These curves plot the yield difference between US treasury bills with different maturities. Naturally, the market goes haywire when short-term bonds give higher yields than long-term bonds. It triggers short-selling in the market due to poor investor confidence.

How will the possible upcoming recession different from the previous ones?

Propertydomain saw that with each recession’s documented background, each of them is different. There is no argument with that. The question is how will it be different this time? There really is no exact reason proven to have caused the recession. Even if we take a look at the published statistics, it is really hard to pinpoint the cause of a Recession. In 2008, the subprime mortgage crisis revved up the BFC or Global Financial Crisis with the financial institutions being collapsed by the unpaid housing debts. In the early 2000’s, the dot com bubble was an evident example of how the prices were driven to extreme levels by an overheated IPO market. This eventually led to colossal correction.

The most recent recession that anyone can remember now is the 2020 Covid Pandemic Recession due to the lock-downs and similar measures being implemented in almost all parts of the globe, disrupted supply chains, and the economical freeze. Each of the mentioned factors are somewhat different but all of them are unquestionably unexpected. It will be more likely an upcoming artificial recession if ever it transpires. The are plans made by the Fed to slacken the economy just enough to decrease inflation but not too much that may cause recession. This is also referred to as “soft-landing” by the analysts. Most of the time, it is not easy to attain due to unforeseen events such as new virus variants, the conflict between Russia and Ukraine, and even the company performances during peak seasons. The soft-landing will be harder this time given the fact that we have more unsettled post-pandemic environment now.

It is really essential for us to keep caution and patience in mind in this period wherein the economy is unpredictable. Giving 100% to stock investment is considered a high-risk action. The top losers pull down most sectors with them in a recession. In this specific round, it is the Technology sector that has been badly hit. Our personal beliefs should not cause us to hold on to more losses that we can bear. Thus, the main motivation behind the Fed’s measures is to kee the inflation under control. If the Fed’s hold on to these actions and plan, the Real Estate market will have 2 main repercussions. Capital growth must be consistently looked into as disinflation slows down the price movement. Despite inflation, mortgages will still cost a lot due to the increasing interest rates while the housing prices becomes moderately higher.

Now, another questions is that will these consequences be felt by the Asian economies.

How will Singapore’s Real Estate Market take this?

It has always been known that Singapore is a capital’s safe-haven. But, is this the same thing for every recession that comes up? Whether it is positive or negative, the global financial system’s situation is always immersed in the US market’s fate. Every decision made by the Fed has a rippling effect to the global economy since majority of the investment fund houses and sovereign wealth funds are usually using US dollars as the reserve currency and the risk-free rate are the treasury bills. If we consider U.S.’s failure to make required interest or principal repayments on debts, it is evidently outside the range of the traditional investors and economists.

Yes, Singapore’s Real Estate Market is surely not exempted by the large-scale changes in the economy but we cannot say that is easily affected by it. It is safe to say that the Real Estate Market in Singapore has more stability than sensitivity. The tight market and mechanics of supply management aid in keeping the prices up, while lessening the instability. The domestic demand also drives a huge part of the demand. Local residents operate public housing. The same demographic also drives the private sector like condominiums. So, the main factor of macro-price changes in the property market in Singapore is the local cooling measures and the Global Interest Rate environment. The volatility is being reduced by the cooling measures. They also stabilize the market prices by prolonging the property periods or mostly referred to as BSD and SSD. It discourages the property owners from having multiple market transactions. The affordability of mortgages in Singapore would be affected by the Global Interest Rate environment. The reduction of the returns and upper-middle range properties might be visible to the property investors. The demand for the upper-middle property investment range will then be lowered.

Generally speaking, it is anticipated that Singapore’s property market will stay strong. It is not likely that Singapore’s real estate market would be negatively affected with the help of firm policies being implemented to keep the price stability and the option to get public housing to keep the properties inexpensive. While most high ranking investors probable look for a way to leave the stock market under its unstable condition,they will most likely find Singapore’s property market as an attractive option for investment due to its fairly strong performance history.

Still, there are groups of people who might be disadvantaged by this, and those are the single citizens under 35 and upper-middle class citizens. Acquiring a private property will surely cost them more. Their income may not be directly proportional to the rising mortgages and inflating prices at a decent rate. It was calculated in the previous articles that a 0.5% increase in mortgage required $900 to be added to the income to be able to keep a $1 million loan affordable. Looking at the current property price increase, the cash outlay for down payment will also be extremely high. The options to get a private property for upper-middle class or those who are single under 35 would be progressively limited.

Is Singapore’s Real Estate Market resilient?

A sudden crash in property prices is something that is not being anticipated. The optimistic growth outlook continues. With regards to the property growth, the luxury property sector is predicted to lead the way into 2023 as shown in the current growth path.

We are expecting to see an impact on the real estate price trends, generally due to the artificial nature of the possibly upcoming recession. Some sections in Singapore’s population will struggle to afford getting a private property. The Real Estate might catch the attention of the high ranking investors who are probable hesitant on investing in these uncertain times that mostly consists of instabilities in financial markets. This will be the key in boosting the luxury property section in Singapore as well as the Southern waterfront properties.