It's tough being a buyer in the markets today.
I just sold off my private property a couple of months ago and am on the lookout for a new home.
The search for a new home has indeed been challenging amidst the current market conditions.
Based on projections by the various major players, it's expected that the private home prices will finish 2022 with a 10% rise. This is similar to the 10.6% year on year surge seen in 2021. This means that private home prices are going to rise by double digits in two consecutive years. In fact, the URA Property Price Index of private residential properties has already appreciated for ten consecutive quarters.
Now you can see why it's tough to be a buyer in the current market conditions.
The reason behind this rise is due to a simple economics theory- supply and demand.
Take a look at the graph below released in a report by PropertyGuru.
The number of uncompleted private residential units have been on a decline since 2019 Q1. The current low number of uncompleted private residential units unsold is way below historical average. The last time such a decline happened with an absolute bottom seen in 2017 is also the period where we saw new cooling measures in the form of reducing SSD holding period being introduced. By reducing the SSD holding period then, it helps to encourage more units into the market with sellers having to hold the units for a shorter period of time without having to pay the penalties. While we are seeing a similar record low number of units unsold in 2017 and now, the situation is actually quite different. In 2017, prices of private homes have been down after consecutive years of decline (which you will see later) while we all know what's happening now with home prices. The difference is due to demand.
In today's situations, the low number of uncompleted private residential units unsold coupled with a record high number of 31,000 HDB units reaching MOP (which I have discussed in this article) is a recipe for high prices. Nowhere in recent years do you see so many HDB units reaching MOP. Very strong demand + very weak supply = phenomenal rise in prices (remember ten consecutive quarters of price appreciation?). This is also the reason why we have been seeing OCR and RCR regions experiencing better growth in recent years as compared to CCR. Majority of HDB unit upgraders will go for units in OCR and RCR regions. Incoming stream of foreign buyers haven't been exactly healthy in recent years due to COVID but that situation should change quickly.
Private home prices haven't exactly always been increasing every single year. While it's true that private home prices are always increasing when viewed in the long term, you may notice from the graph above that there are actually periods where private home prices are on decline (eg. 2013 to 2017).
We are currently on an upward trend of private home prices and I'm personally of the belief that the prices are going to face very strong downward pressures from here onwards.
Firstly, the rise in interest rates and strong likelihood of a global recession are going to hit us sooner than expected. The last time we had high interest rates and an economic recession happening at the same time was during the 1990s when homeowners are pay mortgage rates of 5-7% with the Asian economic crisis happening during the same period. If you look at the graph above, that is when home prices come crashing down. Of course, we can also argue that the situation now won't be as bad as then but we can't discount the fact that it's going to have some impact on home prices.
Secondly, the situation of low supply and high demand isn't exactly going to last forever. It might even have reached the peak in recent quarters. The combination of more supply of units with more new projects coming up in 2023 and lesser number of HDB upgraders in the coming years is going to change the tide. I would think that private home prices in RCR and OCR regions are likely going to be more impacted by this trend. Private home prices in the CCR region have been on a slower growth the past quarters and some developments can even be said to be undervalued in the current environment. Hence, private home prices in CCR might be least impacted from this change in tide.
Overall, I think that the cracks are beginning to show. If the current rise in interest rates is going to continue in the next 2 quarters, the likelihood of private home prices beginning to come down is a reality.
For potential homebuyers like me, we just have to be patient in the current market conditions. I know it's not always easy as the alternative is renting which we all know about how crazy the rents are right now. The best situation will be to have somewhere to stay without having to rent for now but it's a luxury which I think might not be feasible to everyone.
If you do have to really buy now and have some capital, it might be interesting to look at private homes in the CCR region. Here is an article from stackedhomes showing new launch projects nearing the ABSD deadlines. You might find some interesting buying opportunities here.
In case you are wondering what do the general readers of my blog think about home prices next year, here's some initial poll results.
I also do share additional content in my Telegram channel. 140+ like-minded investors have already joined this channel and took part in interesting polls like above. What are you waiting for?