In case you haven’t been following the news, the property market in Singapore has come back to life (kind of) with quite a number of en-bloc deals. MAS (Singapore’s central bank) also had to come out and caution that there was a little ‘exuberance’ in the market. MAS also noted that prices have transaction volumes have picked up while interest rates have remained low.

The commonly used reference rate for housing loans stood at 1.1 per cent in mid- November, compared to a peak of 3.6 per cent recorded in 2006.

However, vacancies in the rental market have remained high. According to the article, MAS noted that there are some 30,000 vacant rental properties in the market. Redevelopment of the land sold through en-bloc deals, together with existing private property developments, could add another 20,000 units to the market (of course, not all would at to the rental market).

What bothers me is that interest rates seem historically low and we seem to be at the start of a rate hike cycle.* Almost every property buyer in Singapore buys their property with a long-tenured loan (think 25 to 30 years) and if you’ve just begun to start servicing the loan, you have to be prepared for the fact that interest rates may be on their way up and drive the lifetime interest rate on your property loan to a level more like 3-5% over the lifetime of the loan.

I’m not an expert in real estate but I’ve heard stories and I have three stories that point towards what’s going on in the property market. Namely, those problems are (1) property owners not expecting a drastic rate hike, (2) vacancy rates are high but understandably so because buyers paid a high price and therefore demand steep rents, and (3) prices are (still) high despite the recent rosy outlook.

Anecdotal Evidence #1: Not many people are expecting rates to go up drastically

I’m not sure how many people are prepared for that. Anecdotally, I’ve had a friend question if rates could even get that high and I was about to slap my forehead because this friend works in a bank. How could he not know what interest rates have historically been like? The interest rate on loans have typically been much higher than they are now and we’re at the zero-bound so unless you believe the world is about to go the way of Japan, you need to prepare for the fact that interest rates will most probably go up.**

Anecdotal Evidence #2: Plenty of vacancies in projects that didn’t make sense

On the other hand, there are some property buyers who seem stuck with a horrible investment. I heard from my boss (he’s an avid follower of the property market) over lunch that some investors in a certain property have problems finding tenants. The property sits atop an MRT station (one of the last stops though so it’s at least 30mins by train to town) and is one of those shoebox apartments (1 bedroom apartment) where the price paid per square foot is ultra high (~S$1700 psf) but the actual cost of the apartment is “low” (~ S$600,000 -700,000).

A glance at listings online shows that owners are asking for close to S$2,000 per month to rent a one-bedder. And I see plenty of listings for the project which means that unless someone’s listed his unit many times over or the same unit had to be listed again week after week, there are many apartments there begging for tenants.*** Whoever has a unit there better be happy letting it stay vacant or I can’t see why someone would choose to pay almost S$2,000 per month to stay in what is effectively a hotel room when you could rent a room in an HDB flat (of course you have to share with some flatmates) in a better location for one-third the price. You have to remember that someone who can afford to pay S$2,000 per month in rent must be making at least S$8,000 per month. Most Singaporeans don’t make that much (median salary is more like S$4,700) which leaves you with foreigners. Foreigners making that much have to be at least on some sort of expat package which means that they come with families and won’t be looking at one-bedders, what more in such a far-flung location.

If there is one property like this, there are more. And my guess is that owners aren’t too bothered by the lack of tenants as long as they have the ability to service the loan. Their ability to service the loan is currently helped by historically low interest rates.

Anecdotal Evidence #3: Property prices are still high (sorta)

The third story comes from a friend of mine. Recently, he bought an Executive Condominium (EC)**** located just across the street from my flat. What this means is that our location is basically the same as far as valuation is concerned. However, the price he paid is almost 3x what I paid for my flat for an apartment of a size about 90% of my flat.

When both our apartments hit the resale market (say in 10 years) which is subject to the forces of demand and supply, I’m not sure if he will see any further upside to the price he paid for his unit. Why? Imagine a potential buyer for his unit surveying the area. The buyer will easily find that 5-room flats (~ 1200 square feet) in the same neighbourhood can be bought for around S$500,000 (assuming prices of HDB flats in this area remain as they are now). If my friend is looking to sell his place for S$1 million, the buyer will have to seriously wonder if it’s worth paying double the price of a 5-room flat in a similar location for a slightly smaller unit that comes with amenities such as a swimming pool and security post.

The only other way to justify the selling price of the S$1 million EC is to assume that the prices of HDB flats in this area will jump so much that the premium for an EC shrinks to maybe 20-30%. Based on that analysis, the upside for buyers of EC at that price is quite limited while the buyers of BTO flats like mine are much more optimistic. On the other hand, the downside is quite limited for flat owners as opposed to EC buyers.

I know my friend didn’t buy the property as an investment (i.e. to make money) but it still points towards the fact that property prices in Singapore remain elevated and we haven’t seen a fall in demand like the likes of post-’97 or ’08-’09. As with any asset class, the usual adage is well-bought is well-sold.



*I’m not an inflationista. Rather, the fed has already begun the hike so it’s not like I’m being a Cassandra.

**I read that someone at the fed did a study showing how Amazon is a factor keeping prices low and I guess if this remains so, then interest rates may not need to be hiked.

***The truth is probably someone in between. Some agent listed the property many times and had to list it multiple times over the weeks. But still not a good sign, no?

****ECs are this weird scheme where the governments allow private developers to bid for land in their landbank to build a condominium development that is sold more along the lines of public housing. After 10 years, the development becomes private and is not subject to the rules that govern public housing. In essence, Singaporeans and PRs get to buy a condo for a discounted price.