When Will Housing Be Affordable Again?
Key Takeaways
Correlation doesn’t always mean causation. Complex systems like the economy are usually affected by more than one single factor.
There are several factors that have caused housing prices to soar, but given its run of +30% over the last 3 years, there should eventually be a substantial re-pricing of the asset class.
Similar to other asset classes, property also does suffer from cycles albeit longer and slower moving ones. Diversifying between property investments, listed and diversified stocks and bonds, cash and other assets ensures that you don’t destroy your wealth when the good times come to an end.
Art, like real estate, is half science, half gut.
Humans love a good story — it’s part of behavioural psychology. As a result, we tend to oversimplify and correlate two events together simply because it gives us comfort and helps us to comprehend complex topics. For example, many initially blamed the Russian invasion for causing the stock market to collapse last year. However the war is still currently ongoing with no end in sight, but markets are performing very differently at the moment. The blame has now shifted to the Fed rate hikes. Many are also attributing the upcoming recession to the Fed as well.
But the truth is, when it comes to complex systems like the economy or markets, why and how it reacts is often not only caused by a single factor. For instance, housing loan rates are still staying stubbornly high while deposit rates continue to decline. And this is despite the fact that the Fed has continued on its hiking path.
When we look at property, a hard-asset class, we can see that residential prices have continued their upwards march despite rising rates, defying the broader trend exhibited by office and retail space. This is shown in the chart below.
Home prices and affordability is becoming a contentious issue and the Singapore government is cognisant of it — with the three recent cooling measures coming within a short span of six months; to add on to the approximately 20 other measures that have been implemented over time since the late 90s.
Some observers have blamed foreigners for driving property prices up. However, like in the case of the economy, there are likely many other reasons for it.
Whilst foreigners could be part of the blame, a more likely contributing factor was that interest rates collapsed to unprecedentedly low levels as a result of the aftermath of 2008. The chart below shows the 3 month SIBOR rate — the base rate where a lot of housing loans are priced off. Apart from 2022, we have not seen rates above 4% since the Asian Financial crisis in the late 90s, with rates staying near 0% for much of the last decade.
Another contributing factor that increased the demand for housing (larger homes in particular) was the pandemic. We’ve seen a rise in remote working and along with it, the realisation by many homeowners that their humble abode was not equipped to deal with this phenomenon. As such, there has been a shift away from shoebox apartments to bigger units as people found a need for separate rooms for their work and school needs.
However, given that property has surged around +30% over the last 3 years, coupled with mortgages approaching 4%, one should expect a substantial re-pricing of the asset class. In general, two factors have to occur before prices moderate.
There are a few ways that prices go down:
When there is a de-sync between supply and demand, OR
When there is increasing mortgage default rates by homeowners or investors.
The first part is quite easy to understand. However, increasing default rates can be caused by a myriad of factors.
From recent URA data shown above, it appears that supply for private residential developments is expected to decline over the next few years. However, there is a counterbalance for this declining supply, with the HDB building more and increasing supply of public housing by +35% over this year and the next. So while affordability for private housing remains at unaffordable levels, the supply in public housing could ease the demand and push more new homeowners towards it.
Another way that prices go down is when default rates go up. Research on default rates reveals interesting insights. Rising interest rates generally do not cause default rates to go higher. In fact, what makes people unable to continue paying their mortgages is primarily: unemployment — which is probably an indicator of economic malaise in the country.
So will this environment of elevated prices continue? Similar to how we invest in stocks and bonds, it is important to look at long-term trends for an idea of how property prices have moved in the past. Because often, we tend to suffer from myopia and overly focus on the short-term. Similar to other asset classes, property also does suffer from cycles. The chart below shows the long term property price trend with the red shading highlighting periods where prices stayed depressed below their previous peaks.
You will see that there are boom and bust cycles — albeit in a slightly less volatile manner than stocks; this is primarily because property is not a daily traded investment. When you factor in your loans and other costs associated with owning property, going through the red cycles would likely be detrimental to your wealth.
So would prices come down this year or the next? We are unable to really predict for sure — but what is certain is that nothing goes up in a straight line. It is very likely that at some point in time, property will become affordable again for many. As with any investment, diversification is key and spreading your wealth across various asset classes is the best way to ensure that you do not destroy your wealth from a single disastrous event. If you want to learn more, come and have a chat with us.
