By Andy Mukherjee
(Bloomberg Opinion) — Singapore’s property market is in the throes of a 2008-type mania, with landlords squeezing tenants for the last possible cent. The previous bout of frenzy ended with the collapse of Lehman Brothers. This time, too, stratospheric apartment rents will return to earth, though the process is unlikely to be as swift as the city-state’s expat community might hope for.
Among major global cities, Singapore tied with New York for the dubious distinction of the fastest rental increase in first half of 2022. But the pain for tenants isn’t over yet. To see why, consider the problem from the landlords’ perspective. Mortgage costs of 2.4% — a 1 percentage point premium over the 3-month Singapore Overnight Rate Average — are double what they were a year ago.
During the pre-Lehman property craze, variable mortgage borrowing costs were declining. Now they’re surging. As the US Federal Reserve pushes its policy rates even higher, landlords will want to earn at least 3.5% annually on their purchase cost. However, 3%-plus rental yields on a new investment can only be found in the eastern or western suburbs, or in the northern parts of the island — close to Malaysia.
Home values around the central business district, preferred by expat tenants, have gotten so expensive that yields have compressed: Rents there will have to rise more to make the math work for homebuyers. Higher asking rents will find plenty of takers in a tight market. But they will pinch bankers and executives returning to the city as economic activity normalises after the pandemic. PropertyGuru Pte. says that based on converted sessions on its portal — when house-hunters leave the listing page to inquire about the properties — leasing demand in the so-called core central region is back. Although rents in this pricey neighbourhood jumped 7.7% in the second quarter, they’re still playing catch-up.
The other reason why tenants mustn’t hope for an early reprieve is Hong Kong. Singapore’s swift post-pandemic reopening has bolstered its appeal, even as its rival financial center’s half-measures — like cutting a mandatory hotel quarantine for visitors and returnees from seven days to three — make living in the special Chinese administrative region a frustrating experience. As Hong Kong shrinks — the 1.6% drop in its population in the 12 months to June was the worst in at least six decades — Singapore has to bulk up. That will need require some readjustment in its housing market.
During 2020 and 2021, household formation in the city-state crawled to a near halt as Covid-19 hollowed out the ranks of foreign-born residents. Over at least the last four decades, the only other instance of a freeze this harsh was during 2011-2012 when the government responded to its poor electoral performance by coming down hard on immigration. But while the traditional source of condo rentals — the expat population — waned during the pandemic, local demand waxed. Delays in construction of subsidised Housing and Development Board flats had young Singaporean couples temporarily renting HDB flats from others. When that narrowed the affordability gap between public and private housing, some of the pent-up demand spilled into the condo market.
Now, however, there are early indications of a reversal. In what’s “perhaps a sign that the HDB rental market is finally slowing down,” asking rents for public-housing flats on PropertyGuru posted their first quarterly decline in three years in the three months to June, the portal’s researchers note. Albeit tentative, this is good news for expats. Roughly 78% of resident households live in public housing; even a slight shift in and out of this bigger market affects rental demand for condos, which account for 17% of dwellings. (The remaining 5% live in landed homes.)
Even with the government being picky about how many expats it lets in and construction proceeding at its pre-Covid-19 pace, new homes to ease the current crunch won’t get built overnight; tenants will get squeezed for a while longer. Once rental yields are more in line with homebuyers’ rising interest costs, there will be takers for the 17,400 new homes that will be ready island-wide in 2023, up sharply from the 10,300 this year. That’s when rental growth may moderate, according to Bloomberg Intelligence.
Some help will come from the government: Singapore imposes steep duties on developers who hoard land to create scarcity. Many of the upcoming projects of 2023 may want to avoid the tax by releasing their units to individual buyers or investment firms. The faster new houses get built and sold, the quicker the private residential vacancy rate of 5.4% will ease toward the long-term average of 7%.
Still, this isn’t 2008. In the absence of a major shock to the property market from a global recession, the demand-supply equilibrium will take time to restore. Meanwhile, tenants may struggle for a respite from scorching rents.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.
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