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Are Singapore property prices too high? How much should it correct?

Posted: 17 August 2014



As at 2014Q2, prices of private residential properties have registered its third consecutive quarter of decline from its peak in 2013Q3.

Since the price decline started, various parties including developers, property consultants and members of parliament have called upon the Government to review some of the property market cooling measures.

I have also written an article Time to tweak the cooling measures? calling for the total debt servicing ratio (TDSR) framework to be reviewed. Unfortunately, not many have read the article. Maybe, it is because the title sounds a little clichéd as others have earlier published articles using the same title.

The Government's stand is clear: it is too early to ease property cooling measures as prices remain high. However, the Government's stand on exactly how much prices should correct is unclear.

In explaining why the cooling measures are still needed, the Monetary Authority of Singapore (MAS) cited that prices went up 60 per cent over the last four years but have declined by just 3.3 per cent over the last three quarters.

What puzzles me is why the bottom of the last property cycle in 2009Q2 was chosen for the comparison. Why not choose the peak in 2008Q2, which were the prices before the disruption of the Global Financial Crisis, for the comparison? The increase would then be only 22% over 5 years or about 4% a year, not unreasonably high.

In assessing whether our property prices are too high, we should be focusing on the long term and not on the short term fluctuations. Taking the market peak in 2013Q3, we can compute the increase in property prices over various time periods:

From	Property Price Index	To	Property Price Index	Duration	Change %	Compounded annual growth rate
2009Q2	133.3	2013Q3	216.3	4.25 years	+62%	12.1%
2008Q3	173.3	2013Q3	216.3	5 years	+25%	4.5%
2003Q3	112.9	2013Q3	216.3	10 years	+92%	6.7%
1998Q3	109.5	2013Q3	216.3	15 years	+98%	4.6%
1993Q3	99.5	2013Q3	216.3	20 years	+117%	4.0%
1988Q3	45.6	2013Q3	216.3	25 years	+374%	6.4%
1983Q3	52.5	2013Q3	216.3	30 years	+312%	4.8%

The compounded annual growth rate of property prices over the last 30 years works out to about 4.8%. Is this too high a growth rate? Has it outpaced the growth in income over the same period?

Using the same approach, we can work out the compounded annual growth rates of Per Capita GDP for the various time periods:

From	Per Capital GDP	To	Per Capital GDP	Duration	Change %	Compounded annual growth rate
2009	56,111	2013	69.050	4 years	+23	5.3%
2008	56,201	2013	69.050	5 years	+23%	4.2%
2003	41,070	2013	69.050	10 years	+68%	5.3%
1998	36,525	2013	69.050	15 years	+89%	4.3%
1993	29,573	2013	69.050	20 years	+133%	4.3%
1988	18,749	2013	69.050	25 years	+268%	5.4%
1983	14,188	2013	69.050	30 years	+387%	5.4%

In some of the periods, property prices appear to increase faster than income. But over a 30 year period, property prices did not increase as much as Per Capita GDP.

What about inflation?

From	Consumer Price Index	To	Consumer Price Index	Duration	Change %	Compounded annual inflation rate
2009	100.0	2013	115.8	4 years	+16%	3.7%
2008	99.4	2013	115.8	5 years	+16%	3.1%
2003	88.5	2013	115.8	10 years	+31%	2.7%
1998	86.4	2013	115.8	15 years	+34%	2.0%
1993	79.8	2013	115.8	20 years	+45%	1.9%
1988	69.7	2013	115.8	25 years	+66%	2.1%
1983	67.2	2013	115.8	30 years	+72%	1.8%

Over a 30 year period, the compounded annual inflation rate is about 1.8%.

While we cannot say whether property prices growing at a compounded annual growth rate of 4.8% is too much, we can be sure that growing at a compounded annual growth rate of 1.8% or less is definitely too little.

For many of us, we bought our home with bank loans. When we fully repaid the loan, say 30 years later, the total amount we actually paid is much more than the purchase price of the property. It will be the purchase price plus interest cost and other transaction costs such as stamp duty, agent fees etc.

It would be very tragic if our property prices cannot even beat the increase in inflation and stayed the same after 30 years.

Although we do not have the historical rates for housing loans offered by banks, the Finance Companies Housing Loans for 15 years published in MAS website gives us a rough feel of what housing loan rates have been like in the past.

The low housing loan rates that we see today has never been the norm. Historically, housing loan rates can be above 5% even in periods when SIBOR fell below 1% eg. 2002-2004. This is because prior to 2007, floating rate housing loan packages offered by banks are all pegged to banks' board rate.

Although SIBOR is known to be one of the components that all banks' board rates are pegged to, SIBOR's exact influence on the board rate is unclear. When SIBOR goes up, the board rate tends to go up faster and higher. But when SIBOR comes down, banks tend to be slow in lowering their board rate.

If a compounded annual growth rate of 4.8% is too high and a compounded annual growth rate of 1.8% is too low, the ideal should lie somewhere in between.

What should the ideal be?

I suggest we use the following chart to help us determine where the ideal should be.

The chart is drawn by drawing line E to join points 1, 2 and 3 and than drawing a parallel line (Line A) to touch point 4. Lines B, C and D are then added.

The area between lines A and B represents the period when the property market is over-exuberant. The area between lines D and E represents the period when the property market is overly depressed. This usually happens during economic crisis. The area between lines B and D is when the market is neither over-exuberant nor overly depressed, with Line C being the mean or the ideal.

As at 2014Q2, after three consecutive quarters of decline, the property price index is approaching Line C. It is likely to touch or fall below Line C in 2014Q3 and can be expected to fall further if the current cooling measures continue as they are.

If prices were allowed to fall 10% from the peak in 2013Q3, it will touch Line D in 2015Q4 and the property price index will be back to 2010Q4 levels.

To allow property prices to fall way below Line C and back to 2010Q4 levels may not be a good idea.

If our economy is still growing, why should property prices fall as though we are undergoing an economic crisis?

Politically it is also untenable as majority of Singaporeans are home owners. Who would want to see their most expensive monetary asset depreciate in the next 5 to 10 years?

Even for first timers, who yearn for lower prices, it is no comfort to know that whatever they buy now is going to be worth a lot less in years to come. They are better off not buying.

My take is that we should aim for property prices to stabilise around Line C and thereafter allow it to increase gradually along that line.

To achieve this, my suggestion is that the Government review the total debt servicing ratio (TDSR) framework to see whether we have been overly conservative. My view is that the property market has become overly illiquid after the framework's introduction.

As at 2014Q2, the volume of resale transactions as a percentage of the total private residential housing stock works out to be only 0.4%, a level only seen during economic crisis periods and is way below the historical average of 1%.

Measures such as the additional buyer's stamp duty (ABSD) and seller stamp duty (SSD) should not be rolled back as they have been effective in curbing property speculation. What we do not want is to unwittingly penalise genuine home buyers.

In my opinion, a slight adjustment of total debt to gross monthly income percentage may be needed for the property market to function properly and Singaporeans to meet their housing aspirations.