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COMMENT: Singapore home prices won’t defy gravity for long

For how long can Singapore property defy a global slowdown? (PHOTO: Ore Huiying/Bloomberg)
For how long can Singapore property defy a global slowdown? (PHOTO: Ore Huiying/Bloomberg)

By Andy Mukherjee

(Bloomberg Opinion) — Housing markets are beginning to crack everywhere from the US and the UK to Australia and New Zealand. In China, the property industry is in a potentially deflationary crisis, while Hong Kong’s home prices are set to test a five-year low. In tiny Singapore, however, demand is defiant in the face of rising interest rates and a looming global recession. The city-state is holding on to the boost it received from its accelerated post-pandemic reopening, which is continuing to attract overseas buyers.

The party won't last much longer, though. Even if international demand is undeterred, expect the overall enthusiasm for Singapore condominiums to start fading as ownership costs — and new government rules — start to bite local buyers.

Foreigners who aren’t Singapore permanent residents purchased 143 condo units priced at or above S$5 million ($3.5 million) apiece in the first eight months of this year, according to OrangeTee & Tie, a property brokerage. That exceeds the 136 pricey apartments snapped up by overseas buyers in the same period of 2019, before Covid-19 disruptions.

But luxury homes are only part of the froth. Middle-class Singaporeans, flush with cash from selling their public-housing units in a sizzling resale market, have also pumped up condo prices. Private property values rose 3.4% in the September quarter from the previous three months, when they climbed 3.5%. Reflecting strong local demand, suburban prices surged 7%, the steepest quarterly increase in 13 years.

Back in September 2009, when prices in the so-called outside central region jumped 16%, Singapore was recovering from the 2008 global financial crisis. The 7% increase this time around came amid strengthening suburban home values, and was largely a result of robust take-up for new home sales by developers, according to PropertyGuru Pte., which runs a popular online property portal.

Millennial and Gen Z buyers simply haven’t seen such brisk spikes — and might believe them to be the new normal. But then, they haven’t lived through 4% interest costs, either.

Mortgage Rates

On Tuesday, DBS Group Holdings Ltd., the largest of the island’s three local banks, raised its fixed mortgage interest to 3.5%. Earlier this year, homebuyers were paying as little as 1.65%. The next increase will push the medium-term cost of homeownership above 4%. Effectively, they already have reached that mark . On Sept. 30, authorities asked banks to assume at least a 4% interest rate while calculating the total debt servicing ratio, a measure of whether borrowers will be able to take on a property loan alongside their other borrowings. That half-percentage-point increase won’t move the mortgage eligibility needle sharply, but it will dissuade at least some borrowers with stretched balance sheets.

More importantly, a new, 15-month cooling-off period before sellers of private property are allowed to buy Housing & Development Board units from other owners should help moderate the public-housing resale market. That should lower the temperature a notch for condos as well.

Foreign buyers have all but shrugged off last December’s increase in already-steep stamp duties. The financial center reopened aggressively even as traditional rival Hong Kong stuck to its excessively harsh Covid-19 restrictions. As expatriates returned to the city-state, condo rents went through the roof and bolstered the investment case for Singapore property as an inflation hedge.

However, the real-estate mania is going a bit too far. The city-state’s small, open economy is powered by global demand, and the first contraction in factory activity in two years in September is already a warning sign of a 2023 slowdown. Singapore has to remain competitive and maintain the social contract of keeping public housing affordable for every new cohort of first-time homebuyers. It was one thing for the city to be a magnet for global money when the Federal Reserve’s benchmark interest rates were near zero. It’ll be risky to inflate a domestic property bubble when they’re forecast to reach somewhere between 4.5% and 5% next year.

The combination of pricier capital and drooping global demand should bring the gradual property-market slowdown authorities are hoping for. Else, they will have to come in swinging again next year with a heavy bat to break up the celebrations.

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.

©2022 Bloomberg L.P.