With property prices on the decline for the last 3 quarters, the logical question on everyone’s mind is “Will there be a property crash?“. This question becomes more pertinent if you own multiple properties or if your housing loan is stretched to the hilt.
The answer is of course no one knows. But we can certainly weigh the probabilities based on past experiences and current economic outlook.
Singapore’s property market is unique in that the government has many instruments in its locker to play the right tunes. By the same token if the music becomes too loud, they mute the instruments to dampen the mood. That’s what we’ve been experiencing the last few quarters. But can the Pied Piper keep playing the same tune?
So let’s discuss: What Causes Property Prices to Ka-boom and Ka-bust
A good place to start is to look at Singapore’s property prices over the last 40 years.
Over the long term the main drivers of property prices are demographics and urbanisation. Singapore’s population grew from just over 2 million in 1975 to 5.4 million today and in that span of time we achieved First World status and is now a bubbling cosmopolitan city. As a result of that, over the last 40 years property prices increased more than 10 fold! But as you can see from the chart above, the rise is not a straight line. It is downright ugly and disorderly.
Property analysts segregate the boom-bust periods into 4 distinct cycles from 1975-1986, 1986-1998, 1998-2004, 2004-2009. We are currently riding the 5th cycle.
I view the price movements as an upward trending line interrupted by dips and plunges. Short to medium term price increases can be attributed to economic growth, relaxation in policies (like allowing CPF to purchase properties), favourable interest rates, ease of financing, shortage of supply and inflow of foreign funds, to name just a few of the factors.
The downward sloping parts of the property price index (PPI) are of more concern to property owners.
Here are the 4 periods of major price corrections in order of severity:
1. 1996 Q2 to 1998 Q4: dropped 45% due to Asian financial crisis
2. 1983 Q4 to 1986 Q2: dropped 36% due to the Pan El crisis and recession
3. 2008 Q2 to 2009 Q2: dropped 25% due to Global financial crisis (GFC), Lehman Brothers collapse and worldwide stock market meltdowns
4. 2000 Q2 to 2004 Q1: dropped 20% due to Dot-com bust, global stocks meltdown, Gulf war and SARS
Of the four major price drops only one is a result of Singapore’s recession from 1984-1986. The rest are due external factors that are beyond our control.
So the big question is will there be a crash and should I buy now?
To answer that you must first decide what your timeframe is. This goes for any kind of investment.
In the next 1 to 2 years, the probability of a crash is slim – provided there are no sudden black swan events. Singapore is an extremely well run economic machine but we are also highly connected to the global financial system. Our financial system and economy is much more robust now than before the 2008 GFC, so the chances of a recession is very low. With Singapore’s economy growing steadily at 2-4%, a crash is highly unlikely. 2016 is an election year so that will form some ‘support’ too.
The many rounds of cooling measures have averted a huge property bubble which further reduced the probabilities of a crash. However, with these measures firmly in place and the government affirming that these rules will stay, the chances of turning a profit within 2 years is also pretty remote.
In this environment it is better to think of the longer term perspective. If you need a roof over your head and intend to live in it for more than 5 years then you do not have much to worry about. With ample supply coming this year and next you have the luxury of choosing a good unit in a good location at a good price.
If you are buying for investment, choose a property with a healthy yield and be prepared to hold it for 5 years or more.
As long as Singapore’s demographics are on an uptrend, property prices over the long run will follow suit.
– By Maybelle Ng
21 July 2014
Hope you find this article useful. If you like to be updated on Singapore’s property market please drop me a note using the contact box on the right. I will provide periodic updates on where property prices are heading
Disclaimer: Please note that these are my personal opinions and not to be construed as investment advice. You are strongly advised to conduct due diligence before making any property investments.