This article can be summed up by a quote from Bridgewater Associate’s co-chief investment officer, Ray Dalio:
“Most people have no Idea what is coming”
Indeed, the crystal ball for the outlook of Singapore’s real estate market has never been murkier. Investment professionals and economists all around the world are forecasting a bleak 2023 for the global economy. With increasing geopolitical tensions, never-ending inflation, rising interest rates and possibly more wars, it is no wonder all the forecasters are bearish.
Strangely though, the Singapore residential property segment has bucked the trend.
Another round of cooling measures was introduced on 29 September 2022 despite the previous round implemented just 10 months ago, in December 2021. Despite the measures in that round, the private residential property index rose by 3.9% and the HDB resale price index rose by 5.3% in the first six months of 2022.
Did the policy makers get the pulse of the residential market wrong? Why were the cooling measures ineffective in the face of rising interest rates, rising inflation and a weakening employment outlook, particularly in the highly paid tech-sector?
Nothing in our crystal ball of spreadsheets and official data could have led us to predict this bullishness in the real estate market since the start of the pandemic. Cost-of-living issues still plague hundreds of thousands of households in Singapore. Yet, we needed another round of cooling measures.
With a barrage of mixed signals, the market could go in either direction in the short term. And it is more likely to end up badly than rosy.
Jeremy Grantham, co-founder and chief investment strategist of Boston-based asset management firm Grantham, Mayo, & van Otterloo (GMO) was quoted recently as saying that “the super bubble has yet to burst.” Stories of bubbles in cryptocurrencies and Special Purpose Acquisition Company (SPAC) during the Covid-19 pandemic reminded Grantham of the Japanese market bubble in the 1980s and the dotcom bubble in the late 1990s. He cautioned that what we are seeing today are signs of the late stages of another bubble.
Growing from a small base, Singapore has not seen a decade-long or drawn-out property downturn in her short history. However, with Singapore’s ageing population, will our real estate market continue to stay rosy?
Given that the short-term outlook is too murky to forecast, let us discuss some immutable and irreversible trends for Singapore and let these trends guide our investment and wealth management decisions.
Decaying leases in public housing
Based on HDB’s annual statistics, we estimate the average age of the current stock of flats totalling 1.1 million to be 30 years. Many Singaporeans seem to ignore the fact that at the end of 99 years, the flats will be returned to HDB, with zero residual value. Moreover, half of the stock, or 550,000 HDB flats, were constructed in the 1970s and 1980s and these are on average 42 years old. Restating that point: 50% of the current total stock of flats in Singapore have an average of 57 years left on the lease.
These units will see their value depreciate at a faster rate because restrictions in financing options tighten up for resale flat buyers as the flats get older. This reduces the pool of buyers, particularly buyers below 40 years of age as they face restrictions on the use of CPF funds and taking on the maximum loan tenure. The shrinking pool of buyers for old flats creates downward pressure on their resale values.
This ageing HDB flat issue is further exacerbated by Singapore’s demographics. The Population and Household Demographics graph illustrates Singapore’s population challenge. The cohort of baby boomers going into retirement is adding to the retiree population at more than 50,000 per year.
Through the generations, parents and grandparents have used their homes as a store of wealth. With the swelling numbers of ageing Singaporeans, we should see an uptrend in properties that are put up for sale due to the demise of the owners.
Resident deaths increased from 17,600 in 2010 to about 24,000 in 2021. By 2030 this number should rise to over 30,000 per year. Within the next 10 years, we should expect to record more than 250,000 resident deaths.
Statistically, 90% of Singaporeans are homeowners and 80% of us “own” HDB flats. The passing away of a second parent would likely result in a transfer of the parent’s HDB to the child, who would most likely own a HDB or a private property. Based on our current ownership laws, the children are likely to sell inherited HDB properties. And looking at the population graph, by 2030 how many young people (based on the 15-19 years age cohort in year 2020) will be in the market for these resale HDB flats, most of which have leases with less than 60 years left?
Compared to Baby Boomers, the smaller population of Millennials and Gen Z is less likely to marry before they are in their 30s, with many of them forgoing marriage altogether. There is also a question of affordability and values with the new generations. The iron rice-bowl jobs of yore have been replaced by an increasing proportion of short-term work. Millennials and Gen Z in 2030 may not be able to afford a property until they have worked longer to save up for their first home.
Increasingly, the younger generation is rejecting the old social norm of “working hard” and owning a home. Good examples of the shifting social values are the FIRE (Financial Independence, Retire Early) and lying flat or quiet quitting (rejection of social pressures for “overwork”) movements that are gaining in popularity around the world, including in Singapore.
Therefore, with a smaller youth population, their different attitudes towards housing, the increasing number of deaths due to an ageing population and their transfer of properties, we should expect demand to be lower for residential properties in the coming decade. The continuous additions to the housing supply pipeline will make the residential market less attractive than what its faithful followers would like to believe.
Numbers don’t add up
Circling back to our earlier discussion, official data shows that from 2019 to 2022, the total population dropped by about 67,000 and the total supply of housing units increased by more than 70,000 HDB resale prices. Yet, private residential prices and private residential rents increased by more than 20% in the same period. This is inexplicable.
Either our understanding of the economics of demand and supply is completely wrong, or the official data which we have relied upon for decades is somehow deficient. That is why we urge readers to look beyond the murky short-term future and stay focused on the immutable and irreversible trends.