Updated: Sep 5, 2020
A simple illustration of how I see Singapore’s real estate market is really like.
The tight-rope walker is akin to our government; specifically the Ministry of National Development & Monetary Authority of Singapore, who watches for all financial stability issues surrounding our little red dot and beyond.
While it is necessary for inflation to take place, and asset prices to grow, the rate of growth (Gradient of the tightrope) must be gradual and in pace with the rest of economic & income growth & wealth distribution among the masses.
Why is inflation necessary you may ask?
1. An increase in wages (Income inflation) increases consumption and spins the wheels of an economy, attracting foreign investments and maintaining a healthy psyche within the population. 2. Goods & services inflation (We rely mainly on imports) with income stagnation means a declining quality of life which is unacceptable for any country.
3. A steady growth in prices means a steady growth in the economy & a healthy national psyche.
Among many other reasons, these are 3 fundamental tenets why most developed nations around the world work towards that magic 2% annual inflation rate for their economies.
Now, as Singapore is a small country, we are heavily influenced by global events like grass in the wind.
What can cause the tightrope walker to tip off balance and fall are the ever-looming winds of global uncertainties and black swan events like the Global Financial Crisis, Trade war threats and presently, the corona virus.
Such winds can carry with it sentiments of doom and gloom when people lose their jobs, the economy slows down and negativity magnify causing a loss of hope and confidence.
At the other end of the balancing bar are the winds of increasing fund flows searching for a safe haven; of which Singapore, with her strict rule of law, attractiveness as a home and investment and overall economic strengths, have grown into an asset class akin to gold.
We have witnessed such a the wave of liquidity seeking to overwhelm our shores since 2009 that Additional Buyer Stamp Duties have to be increased several folds over the last decade; without which severe asset bubbles would have toppled the tightrope walker.
Where are we, the average homeowner and investor, in the illustration?
Well, we are actually sitting on the shoulders of the tightrope walker as “he“ navigates the world with his higher level information & insights.
The ability to connect the dots and synthesize overwhelming data points collected in real-time from the various ministries and intelligence units.
“He“ would know when exactly to release the brakes and to floor the accelerator, as time and again, through his demonstrated ability to act rationally and timely in rescuing Singaporeans' jobs, small medium enterprises and to resuscitate the confidence and sentiments of our nation.
Taking a step back to see clearly
Fear is emotional, irrational and our natural inclination to magnify it in our minds stem back to the times of our ancestors.
To survive, we always had to heighten our awareness of risks. Can this plant be eaten? Is a sabre-tooth lurking just behind the bushes?
While times have changed much since then, our natural tendencies to play it safe, magnify fear in our minds and favour inaction as a decision can be the very reason we miss out on opportunities and rewards too.
4 Key Market Stabilisers
After weathering through major economic storms - 1973 Oil Crisis, 1985 Recession, 1997 Asian Financial Crisis, 2008 Global Financial Crisis and property market bubbles, the current set of ministers at the helm (I will call them Government V5.0), are much better equipped with an arsenal of economic heating and cooling measures in their playbook.
The Total Debt Servicing Ratio (TDSR) - creates a financial margin of safety to prevent over-leveraging on properties.
The Loan To Valuation (LTV) Limits - Lowers the risks to banks and individuals in their ability to service loans during economic droughts.
The Additional Buyer Stamp Duties (ABSD) - Increases the barrier to entry for foreign funds and lowers the risks of dumping in times of crisis. It also prevents land hoarding by listed or foreign developers which can result in market manipulation.
The Government Land Sales (GLS) Programme - Moderates the supply curve to prevent over eager land bidding that happens when developers start their land banking cycles.
Many more policy tools such as the Seller Stamp Duties (SSD), Development Charges, Qualifying Certificates (QC) among others are also working alongside these 4 major market stabilisers in creating a safer investment environment sheltered from vagaries of the world.
Safety Net & Patterns of Economic Stimulus
What we have seen in the property market in the past decade is a result of Government V5.0's effort that, apart from being cooling measures, are also heating measures that are waiting to be deployed.
And that is the genius behind the calibration of each of these policies. We might be a young nation with a short history but who's stopping us from learning from the collective histories of other nations?
Imagine where prices will be now had the ABSD not been introduced in 2011.
Would private properties still remain within reach of the top 20% of Singaporeans?
Say for example, the COVID crisis becomes a 6 months long outbreak (Similar to SARS) and our economy goes into slumber.
The businesses affected, developers included, will have to start ramping up sales volume in order to retain staff, make payroll to contractors and continue to invest in Singapore.
What then can the government do?
Thankfully, we are not a nation made up of many states.
Unlike federations like the United States or Malaysia, Singapore can dispense economic medication much more congruently and easily as there are no differences in state constitution, taxation and laws.
To invite foreign investors in, all we need to do is to revise or lift the ABSD.
To encourage developers to buy land, all we need to do is to lengthen or lift Qualifying Certificate period or ABSD remission periods.
To encourage developers to redevelop old buildings, decrease the development charges under the Differential Premium system or the cost of topping up land tenure.
To encourage local buying, simply increase the Loan To Valuation or lower the cash requirements/ABSD for Singaporeans and PRs.
These are just some simple examples that will immediately see a spike in sentiments and volume to give the market a jolt to its senses.
Mix them around for various effects and outcomes. Effectiveness guaranteed.
Just look at how a slight tweak of the SSD in March 2017 fuelled the beginning of the current cycle!
Last but not least, we may not be that old to have witnessed all the past cycles, but a study of the history of government's response to economic crises can tell you what to expect.
The graphic below is a refresher of the past economic stimuli due to crises in 1985, 1997 and 2008.
In July 2019, at the peak of tensions between a US-China Trade War standoff, a robust stimulus package was ready to be launched to help Singapore weather the storm.
At each turn of an unfortunate event, we can and should be confident that an injection of economic stimulus to the right extent, applied to the right areas, will bring us all back on track (Though not to be confused with complacency).
That is until Singapore loses her position in the world and lustre in the global economy which i hope never happens.
Until then, my bets are still with Singapore denominated assets especially property and REITs.
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Stuart Chng, Senior Associate Executive Director of OrangeTee & Tie, is a renowned leader and personality in the real estate industry.
He adores music and can play a few instruments decently without upsetting his neighbours. When not doing so, he enjoys pillow fighting with his son and coming up with silly puns which barely amuses his wife.
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