If property prices of a country go up by 10% in a year, most of us would think that the property prices are getting more expensive and possibly a bubble may be imminent. If property prices move down by say 5%, we may think otherwise that the prices are getting cheaper. This case will be true if we look at the absolute numbers.
For example, if the price of a property increases from $1M to $1.1M, the property has increased in price, and thus it is getting more expensive. However, does that necessary mean that there is a bubble developing in the property market?
What is expensive?
If we were to look at the same example but from another perspective, prices of property may not be getting more expensive.
For example, if the annual average income of the country’s population has increased by 10% in a year and the property prices has only increased by 5%, then would you still think that property prices are expensive relative to the population’s affordability to buy a property? Here, in relative sense, the property seems to be more affordable to the population.
How about comparing the property prices relative to the countries around it? If over the same duration of time, prices of neighbouring countries have doubled, yet the property prices here have only gone up by 5%, is the property prices here being expensive then?
Therefore, how we define “expensive” or what is a “property bubble” becomes very critical.
What is a bubble?
For me, a property bubble is, when the income of the country’s population cannot keep up with the country’s property price increase. The income of the population can no longer afford to buy a property there. We can also use the median home price to income ratio as a gauge for it.
Comparison across different cities
I chanced upon this article in Business Times, 18th May 2019. The chart illustrates the comparison of the median home price to income ratio across the various gateway cities.
From the chart, we can see that Hong Kong ranks highest (at 17 times) in terms of home price to income ratio, while Singapore is the lowest (at 4.6 times). This may imply that Singapore property is most affordable to her population in these gateway cities.
Another way to look at the chart is the trend of the movement of the chart. Again, here we noticed that the home price to income ratio increased sharply for Hong Kong compared to Singapore over the years. Meaning the prices there become increasingly unaffordable in Hong Kong, while Singapore has kept the affordability quite well for her population.
Why is this important?
Imagine if you have invested in an overseas property and subsequently you want to sell it. Would you expect to sell it to the local population there or will you expect another overseas investor to buy from you?
In comparison of demand in terms of absolute numbers, the demand from local population will almost all the time be more than overseas investors. Imagine the property you bought is not affordable to her local population, you will have zero local demand and you can only rely on the overseas buyers. You may find it more challenging to sell your property then. Furthermore, will the overseas property buyer prefer to a brand-new property purchased directly from a reputable developer or buying a property from you on the resale market?
For selling any property in the resale market, usually it is very critical for the local domestic population to be able to afford in order to sell it reasonably fast. Thus, before investing in any property, do check if the local population can afford it also.
Closer look at Singapore property
I have complied the average property price movement for Singapore property for the last 20 years.
Source: 99.co
You can see that the average increase for the past 20 years is around 117.92%. Divide by 20, its about 5.89% per year. We can also observe that the general trend for property price in Singapore is generally moving upwards in the long term. Even though the home price to income ratio compared to other gateway cities is not going up, the prices of Singapore property is still growing. Main reason is the overall income growth of Singapore population can keep pace with property price increase. The local population can afford the prices of property in Singapore. Hence, there can be a strong domestic demand for property in Singapore.
Why the prices in Singapore are not a bubble compared to other gateway cities?
The government has introduced various property cooling measures over the years to ensure the property market can be sustainable. This includes the introduction of total debt servicing ratio measure, additional buyer stamp duty, seller stamp duty and limits to loan-to-value to ensure property buyers are not over leveraged and to ensure a healthy growth in the property prices. In addition, the government also controls the supply of housing through the Government Land Sales program to ensure that the property market will not suffer in a sudden big downturn. I would agree that these policies are sound in keeping the property market sustainable in the long term.
If you are looking to learn more about property investment in Singapore, I conduct free workshop on how to analyse and find the right property. Just head on to the Seminar page to find out more.