End of the 7-year Singapore property bull run?
Morgan Stanley sees an end to the property bull run in 2024. Landed home prices are down -3.6% in 3Q23.
What would a foreign bank know about the Singapore property market?
You or I may scoff.
But these are the same Morgan Stanley analysts who called for a Singapore property bull run in 2018, and boy, did that rally have legs.
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Let's take a closer look.
The basis of their call seems to rest on three major factors - (1) increasing vacancy rates, (2) huge supply coming onboard from 2024 and (3) increased government regulation deterring home upgraders.
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Factor #1: Cooling measures in 2023 will impact housing prices from 2024-25
We're now in the longest running (7-year) private residential home price rally since the 1980s.
While there are obviously beneficiaries of this (developers, agents, lawyers, shareholders, homeowners), there are also louder calls complaining about home price affordability concerns (from younger generations, or those whose incomes have stagnated relative to property price gains, inhibiting them from buying their dream homes).
In response, the government introduced a double whammy of cooling measures in April 2023 and Aug 2023. The first set are aimed at private residential properties, and the second set are aimed at HDB properties.
In April 2023, the government hiked ABSD rates for private properties from 17% to 20% for a second property, and 25% to 30% for a third property.
Even HDB upgraders have to pay the 20% ABSD tax upfront when buying their private property. They only receive a refund of the 20% ABSD when they sell their HDB flat within 6 months of buying the private property.
This works to dampen demand by HDB upgraders for private properties. New-launch prices of private properties may also be bumping up against the upper limit of affordability for HDB upgraders.
Sellers of private properties must also wait 15 months before they can buy HDB flats. This also acts as a deterrent to those who are looking at private property as a retirement vehicle - something they sell for a profit, before downgrading.
Furthermore, foreign investors see their ABSD double from 30% to 60%.
All in, the MAS estimates that 10% of property demand will be affected by the April 2023 set of cooling measures.
Morgan Stanley expects the cooling measures to finally take effect in 2024, along with higher mortgage rates acting as an effective deterrent to demand.
Factor #2: Housing supply from 2024 onwards is much higher
Significantly higher housing supply is coming onboard from later this year to 2025.
In fact, government land sales has hit the highest in a decade.
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Around 39,700 private residential homes will be completed between 2023 to 2025, according to URA data. Out of this, 29,350 will be made available for sale later this year to 2024.
All of this is part of the 100,000 public and private housing units to be completed between 2024-2025.
Putting Factor #1 Lower demand with Factor #2 Higher supply, it is no wonder that Morgan Stanley expects property prices to moderate in 2024-25.
In fact, vacancy rates are already increasing.
Factor #3: Higher Vacancy Rates
What are vacancy rates?
They are the number of vacant units divided by the total number of units. They are a useful insight into the health of the housing market.
Vacancy rates have been increasing across all regions in Singapore.
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Vacant completed units in 3Q23 increased by 915 units, bringing the vacancy rate to 8.4%, from 6.3% in 2Q.
The breakdown across CCR, RCR and OCR are: 10%, 9.3% and 7.3%.
Generally, a healthy vacancy rate is between 3-5%. Anything at 10% suggests that price declines are ahead.
Don't panic
What if you are mortgaged to the hilt and just bought a condo in the core central region?
I don't know if you remember the 1998 Asian Financial Crisis, or the 2008 Global Financial Crisis, but many landed homes then were in negative equity.
Negative equity means the mortgage is larger than the value of the house, as house price declines happened after buying a house on mortgage.
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Although mortgage rates are at multi-decade highs, and there is rising mortgage stress, I don't think a scenario of negative equity would happen again, barring a severe recession in 2024.
Morgan Stanley analysts see only a mild correction of 3%, lasting from 2024 to 2025.
Their call caused a 2% correction in the share prices of Singapore property developers.
Their outlook had a preference for Reits, citing fewer headwinds for this group.
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