Property market thesis

If you have spoken with me about the residential property market in Singapore over the past year, I would have opined that it was a bad idea to invest right now. I usually state a couple of reasons but am unable to provide a comprehensive view, given the constraints of casual conversation. Here's my comprehensive set of reasons:

Dropping rental demand and increasing costs

When I first purchased my properties in 2010 and 2011, getting tenants was easy as the government had only just started implementing some laws that made it more difficult for foreigners to come work in Singapore. As the rules got progressively more stringent over the years, it became more and more difficult to find good quality tenants that were willing to pay a good rent. What I was feeling is reflected in the steady increase in vacancy rates from 2010 (~5%) to 2015 (~8%). 

Every year, my rental dropped as I renewed the tenancy agreements. To give you an idea of the scale, my first apartment I bought in early 2010 commanded a rental of $2,750 a month. By 2017, this had fallen to $2,200 per month. At the same time, my monthly bank repayments had gone up from $1,290 to $1,638. Throw in property agent fees (1/2 month rent), property tax ($1620), monthly maintenance fees ($282), 1-2 weeks vacancy a year when switching over tenants and the odd repair fee, by 2017 I was only breaking even. Do note, my monthly bank repayments were on my original purchase price of $630,000. I sold it for $765,000 in early 2018, so if I just increased the monthly bank repayments proportionately, the new owner is likely paying about $2,000 a month. This is the best case scenario, as loan limits (% of property price, length of loan) have become more stringent as well. With interest rates on the rise, this equation is only going to get worse. 

It is likely that anyone who purchases a new property at today's prices is unable to cover the costs of the property with just the rental alone. So instead of getting a monthly stream of passive income, the owners are effectively getting an additional expenditure. Sure, part of the money goes to paying off the principal amount and is not technically lost, but this is locked up and not usable for other investments unless you refinance your property.

Property cooling measures

The government has consistently maintained that it thinks the property market is over-heated and has taken concrete steps in the form of property market cooling measures each time the property price index shows a continuation of the uptrend. We can fully expect the government to consistently implement more measures to prevent the property market prices from increasing much further.

It is clear that any removal of property cooling measures would be interpreted as a sign that the government is easing it's stance. This would cause the property prices to spike up, as there are many investors waiting in the wings to jump in. The government knows this too, evident from their careful announcement of adjustments to some measures a few years back, so there is almost no chance for the government to remove the cooling measures unless there is a significant drop in property prices across the board. 

Possible over supply 

This topic has been discussed at length in the local media recently, with several articles like this CNA article and this more recent Today article, pointing to the large existing supply of unsold units and uncompleted units about to come online. According to URA statistics (Q3 2015, Q3 2018), there has been a steady rise in the vacancy rate from 2010 to 2015, but it seems to have been stabilizing in the more recent years, likely due to the impact of the property cooling measures. Even if you are not convinced there will be an oversupply of units, there is certainly no chance of an upside in property prices caused by a shortage of units. 

Limited demand

The property cooling measure that makes foreigners pay a flat 20% tax has kept most foreign buyers away, so most of the demand is local organic demand. If you have a look at the vacancy rates, ​you can clearly see that the vacancy rates for OCR, which is the typical sector for HDB upgraders, is dropping. The vacancy rates for the CCR and RCR, the regions usually purchased by foreginers, is holding steady and increasing respectively. 

Buying a unit in the OCR for investment is not the answer either, as locals do not have a strong rental culture. The market for rental demand is dominated by foreigners, which prefer to live in the CCR and RCR, close to their work places. So if you buy a unit in the OCR, you may face less competition when trying to sell the unit a few years down the road, but in the mean time, you are going to have difficulty finding good tenants. 

The enbloc fallacy

Are you able to name any industry where the increased cost of production is seen as a sign that the industry will do well? If the cost price of iphones doubled, do you think Apple will do better or worse? The media line that increased enblocs at record prices means that the property market is heating up is pure nonsense and does not stand up to basic scrutiny. However, once you realise that the source of this line of argument are the players in the property market (developers, property agencies, etc.), then it makes sense. They have a vested interest in keeping demand high and are willing to paint a rosy picture even when the facts point otherwise. 

To me, the increased enblocs are a sign of overcrowding of desperate developers. What happens to Apple if they can't sell anymore iphones? What happens to a property developer that cannot develop property? You need land spaces to develop property, so the developers are outbidding each other at record prices to get at those land spaces. It is a matter of survival for them, as getting none of the land spaces means that the companies will eventually run out of revenue and fold. 

So the developers that have bought the land spaces at record prices will need to sell the units at record prices in the future to cover their costs and be profitable. Given that there is already a large supply of existing unsold units at lower prices, what makes you think buyers will suddenly want to pay record prices? I expect the smaller developers will likely be unable to sell their units and either go bankrupt or be consolidated into larger developers that have large overseas projects (Capitaland) or different lines of business (Wing Tai). 

Prediction

Low rental demand, low property demand, high supply, desperate developers and a government that wants to prevent price increases. So why are property prices still going up? Simple, without a large trigger, developers with large balance sheets and individual owners with a steady salary are able to hold out and keep their prices high in unison. This forces buyers who want/need to buy for whatever reason (HDB upgraders, newly weds, buying to get kids into a nearby school etc.) to pay existing prices, as there is no alternative.

Once a trigger hits though, like a recession, individual owners will lose their jobs and be unable to fund the monthly payments. They will either unload at cheaper prices voluntarily, or the banks will step in and put the properties on auction. This will start the fall in prices. Developers will be forced to unload their existing stock as they are faced with forecasts of lower prices. A glut of supply will flood the market suddenly and prices will crash. The bubble will have burst. This is exactly what happened in 1997 with SARS and it took almost 10 years before prices returned to their 1997 levels. 

The global synchronized growth fueled by excessive money printing aka Quantitative Easing in US, EU and Japan will eventually come to an end. This exercise has largely stopped and the US and EU governments are starting to think about reversing some of that. This increases the likelihood of a global recession in the coming few years. This will likely be the trigger for our local recession and crash of the property market. 

​Will my prediction hold true? Only time will tell. 

Conclusion

With a low chance of capital gain, negative dividend rate, and a moderate chance of a large capital loss, the risk-reward ratio of investing in property is just horrible at the moment. There are far better places to put your money to work.