Property has always been the “talk of the town” in Singapore, and has gained further attention given the continued strength of property prices. Some government measures to cool down the property market have not overly suppressed investors’ sentiment.
The property market in Singapore started to race ahead of the underlying economy in between 1994 and 1995, and peaked in 1996. That huge deviation proved to be a bubble. The bubble was pricked by anti-speculative measures introduced by the government, and later by the Asian financial crisis.
In 2007, property prices started to surge again, and the correction came soon after in 2008. However, it now appears that it could just have been a blip. Prices have again resumed their upward movement, and properties now sit at the highest level relative to the GDP since 1999. The year between 1994 and 1997 saw significantly higher property prices relative to the GDP.
However, a few things are different today, primarily the low interest rates, which allow investors, who take up an 80 percent loan to be paid off over 30 years, to entirely service their monthly mortgage payment from the rental income. In Singapore, the mortgage rate is calculated based on the one-year interbank rate plus 1.5 percentage points.
Based on URA’s figures, the average price of an apartment in Q1 2010 was $9,952 psm and $10,490 psm for condominiums.
On the rental side, the price of non-landed private property was $34.06 psm a month, thus gaining a rental income of $3,406 from a 100-sq-m unit. The price covers more than the mortgage payments, but additional expenses from owning a property, like property maintenance and property tax are not taken into account.
Between Q2 2005 and Q1 2008, there was a negative cash flow for property investors, but since Q2 2008, there has been a positive cash flow. In fact, the positive cash flow could have been bigger for those who had opted for floating rate housing loans.
In the last 20 years, rates are at the lowest level, with the median level of interbank rate at 2.7 percent. Based on current rentals, the interbank rate has increased by less than one percentage point to 1.5 percent for cash flow to turn negative for property investors. For perspective, the average interbank rate in the past 10 years is 1.375 percent.
The present low bank rates also indicate that the rental return on equity (ROE) for a property investor is high, at 9.5 percent. The rental rate in the country is reduced by 10 percent to factor in property tax and some of the other expenses. However, it does not consider potential capital appreciation.
In terms of affordability, the figures continue to look reasonable. According to the Department of Statistics, the average monthly income for those among the 71st to 80th percentile households was $8,010 in 2006, $8,730 in 2007, $9,720 in 2008 and $9,559 in 2009.
Meanwhile, rentals are not expected to accumulate significant gains. Not helping matters are the substantial number of new stock coming onto the market in the next few years.
But the demand is left unknown. Singapore’s status as a safe hub city in Asia is obtaining traction. Given the size of the country, a small increase in demand can affect price trends.