In 2021, we saw property prices shoot up 10.6 per cent across all segments, which was already the highest in around 10 years – then in 2022, prices still continued to rise by another 8.4 per cent.
We have also seen that, among new launches such as Sceneca Residence, Sky Eden @ Bedok, Tembusu Grand, and Grand Dunman that – even in fringe areas – new launches can top $2,000 psf; an amount that, back in the 2010’s, we would have associated with prime area condos.
This has led many to ask if it’s still wise to go ahead with property purchases this year. This is not an easy question with a single answer, as each home buyer’s financial and lifestyle needs are unique; but I can highlight the general principles to guide your decision.
First, why would someone want to buy property in 2023?
Let’s first address the question of urgency, or why some buyers don’t just “wait it out”. The reason has to do with the pace of private property price appreciation, in contrast with assets like HDB flats.
You may have read in the news that resale flat prices are at a record high; and this is certainly observable:
According to Square Foot Research, resale flat prices in general have risen from an average of $461 to $550 psf, between 2021 to the present.
This is an increase of around 19.3 per cent, in the short time between the tail end of the Covid pandemic to the present.
This looks impressive, and may lead you to think many HDB sellers won’t have issues buying a condo today. But here’s the reality of private non-landed prices:
Here we see the prices of new launch condos over the same period. Prices have significantly outpaced resale flats, rising from an average of $1,721 to $2,135 psf in the same time period; that’s an increase of 24%.
Even if we look at resale condos, we can see that resale flats don’t outpace their appreciation by a huge margin:
Resale condo prices rose from an average of $1,306 to $1,537 psf, an increase of 17.6 per cent; it’s lower than resale flat appreciation, but by less than two percentage points.
All of these property segments were outpaced by the resale landed market:
Resale landed homes jumped from an average of $1,306 to $1,685 psf, up by 29%.
In short, we can see the price gap between an HDB property and a private property is generally widening, despite the uptick in resale flat prices
Most private property buyers come from the ranks of HDB owners. Via property wealth progression, many start out with a flat, sell it after the MOP, and upgrade to a condo or EC; and perhaps from there to higher aspirations like a landed home.
However, this traditional method of wealth progression is quite sensitive to the gap between flat prices, and private property price. If the price gap between the two is too wide, even the sale of the HDB flat may be insufficient to make the leap toward private property.
On top of that, we need to consider the high prices of resale flats are not likely to last.
Production of new flats was ramped up by 35% in 2022 and 2023, creating around 23,000 new flats each year. Rising supply will eventually put downward pressure on resale flat prices.
In 2022 and 2023, the Singapore government ramped up production of HDB flats by 35 per cent. Around 23,000 flats were built in these two years, and while they are new now, they will eventually add to the pool of resale flats.
Then in September 2022, the government passed tighter cooling measures, which imposed a 15-month waiting period for private property owners looking to downsize to HDB. This helps to arrest the flow of cash-rich buyers going into the resale flat market, slowing the price increases.
We can conclude the rise in resale flat prices is likely unsustainable – and this leads to a sense of urgency among some buyers. They know that the longer they wait, the more out of reach a private property might become.
This compels some to consider buying even in 2023, as waiting could mean prices will just rise even further, or the gap between public and private housing will widen even more.
Interest rate factors in 2023
Did you know that, if you’re a landlord, you can claim the home loan interest
as a rental expense?
Another common question is why anyone would buy property, in a time bank home loan rates are high.
First, let’s address the fact that – even at today’s rates – a mortgage is probably the cheapest kind of loan you will ever have. At the time of writing, the typical bank fixed rate is around 3.8% per annum. For comparison, the typical personal loan ranges between six to nine per cent, whereas credit cards are north of 25%.
The interest rate for home loans is so cheap, even billionaires use home loans, despite being able to pay for the entire property.
Second, if you are a landlord renting out your property, the interest rate portion of your home loan is tax deductible anyway. IRAS allows this claim under rental expenses for individuals.
Third, the interest rate on bank home loans in Singapore is impacted by central bank policies in the US; and these policies tend to be quite cyclical.
The United States Federal Reserve (the Fed) raises rates when inflation is high, and lowers the rates when inflation is too low (i.e., they see signs of a weakening economy).
During the Global Financial Crisis in 2008/9, for instance, the Fed dropped interest rates to zero to stimulate the economy. In Singapore, the knock-on effect was so strong that some bank home loans ended up with a negative interest rate.
At present, rates are higher – but that doesn’t mean they’ll stay that way forever.
Once the US is able to stabilise inflation at a target rate of two per cent, the Fed will likely to ease off further rate hikes:
It is improbable that buyers will be paying the same high rates for their entire loan tenure. Historically, there has been a cycle of interest rates rising and then falling again, around every two to three years:
If we measure overall interest rates over a 25-year, the long term mean interest rate is around 1%.
Finally, note that when you buy a new launch property, you are not paying the full amount from the very beginning. The monthly loan repayment increases as each phase of the property is finished (Progressive Payment Scheme), so the impact of the higher current rates are mitigated.
So are these good reasons for you to buy in 2023?
It’s not just market conditions, but your personal financial goals and situation that determine if you should buy today
Not in and of themselves. This is the general basis of why it may be good to buy even in 2023, if you have planned well and are in position to afford it.
You should meet any of the following criteria before you consider buying in the current market:
· If you’re upgrading, you have properly planned the financial aspects of shifting to private
· You are relatively debt-free besides your housing loan
· You will have sufficient holding power for any property you purchase
· You have a property that has appreciated, and can fund a better asset
· You have a clear plan and realistic expectations on what the new property will do
1. If you’re upgrading, you have properly planned the financial aspects of shifting to private
Are you familiar with how much of your CPF you have used, and how much you need to refund? Likewise, how much will you have of the sale proceeds, after paying off your existing loan?
Buyers who have reached the age of 55 or older must also be aware of their CPF arrangements; your CPF Ordinary Account (OA) may already have been folded into a Retirement Account (RA). If so, you can only use CPF monies that are in excess of your basic retirement sum.
When you buy a private property, the minimum down payment is five per cent in cash, plus another 20% in cash or CPF.
There is also a Total Debt Servicing Ratio (TDSR) that can cause you to need a bigger down payment. The TDSR caps your monthly loan repayment to 55% of your monthly income (inclusive of other loans like credit cards, education loans, car loans, etc.)
For example, say you want to upgrade from your flat, to a new condo priced at $2 million.
With the maximum loan, you will need at least $500,000 as the down payment ($100,000 in cash, $400,000 in any combination of cash or CPF).
Over 25 years, at an interest rate floor of four per cent* per annum, the estimated monthly repayment is around $7,917 per month. This means your monthly combined income must be at least around $14,395 per month.
But if you earn less – say $12,000 a month – then your TDSR limit is $6,600. To get to this amount, you need to lower your loan quantum from $1.5 million to around $1.25 million; this will reduce monthly repayments to about $6,600.
However, lowering the loan amount means you need a down payment of $750,000, rather than $500,000.
You need to ensure you can cover the difference after discharging the current home loan, plus have cash on hand after refunding any CPF monies you used.
If doing this would wipe you out financially (e.g., you have no savings or emergency fund after paying all this), then you are not ready to buy; especially not in a volatile year like 2023.
This also shows why your current home plays a big role in which property you can afford next – if you have aspirations, call or WA me at 9068 9692, so I can help you create a long-term plan for property wealth progression.
*TDSR calculations always use the floor rate of four per cent, even if your actual loan package is cheaper.
2. You are relatively debt-free besides your housing loan
Save up and avoid using credit, prior to a home loan application.
More debts increase the risk of exceeding the TDSR limit.
As you can see in point 1, the TDSR cap of 55% of your monthly income, plus the high interest rate floor of four per cent, can be quite tight. You definitely want to be under the TDSR, to minimise your risk of needing a higher down payment.
When you have car loans, credit card loans, or other debts however, this adds to your TDSR limit. To use the above example:
If your combined income is $12,000 a month, your monthly home loan is capped at $6,600 per month. But if you have a car or credit loan that costs you $1,500 a month, then your home loan cap falls to ($6,600 - $1,500 = $5,100).
For this reason, buyers need to focus on paying down other existing debts, before they try for a home loan this year. Those who have substantial debts to clear must focus on reducing these as best they can – otherwise their maximum loan amounts may be too small to finance their desired property.
3. You will have sufficient holding power for any property you purchase
Let’s acknowledge that 2023 is a hot market, which means in the near term there’s a chance home prices may lose momentum. It’s a very real risk, for example, that the government will impose tighter cooling measures still, if they feel prices are too out of control.
This can result in price dips or slowing price growth after 2023. We saw the same thing happen back in 2013/14, where prices declined for a few years after a peak:
In July 2013, resale condo prices were about $1,284 psf – considered high at the time. We can see that after 2013, prices struggled to show any discernible rise – they hovered at around the $1,260+ psf range, and it was in May 2016 before we saw prices once again start rising to $1,403 psf.
For buyers forced to sell shortly after buying the 2013 peak, their purchase would have been a bad move. But for buyers who simply continued to hold, at least till 2016, they would have more than recovered their initial price.
Similarly speaking, buying in a boom market like 2023 is less of a risk if you have holding power, and can wait out any downturns.
4. You have a property that has appreciated, and can fund a better asset
Perhaps you have an older condo that has seen good appreciation; or an HDB flat that is in high demand.
It may be possible to liquidate this asset, to purchase a new piece of real estate with even better prospects. For example, you may have a 99-year leasehold walk-up that is coming close to its 40th year. At this stage, further appreciation could slow down due to lease decay.
(Banks may reduce the loan quantum for leasehold properties with 60 years or less on the lease, which discourages some potential buyers).
It may be time to sell the property, and purchase a new launch with a fresh lease; this can even help to justify better rental rates, as your property is in better shape.
5. You have a clear plan and realistic expectations on what the new property will do
Ultimately, my answer as to whether you should buy now depends on whether you have a clear picture of what the property is for.
If your pursuit is high rental yield, then a shoebox unit or older resale condo might still serve your purpose; and would have a lower quantum (ideal for a pricey time like 2023).
But if your purpose is owner-occupancy, with an eye toward resale gains, then we’d need to look at newer and larger units; and my answer will again vary based on the types of gains you’re looking for (e.g., properties in the CBD can appreciate quite differently from ones in Marine Parade or Jurong).
A key differentiator here is also the holding period – as a general rule of thumb, sellers with longer holding periods tend to see better gains; even compared to others in the same neighbourhood.
2023 is a volatile year, but this is precisely why property may be the ideal asset at this time – it is a safe haven investment, that has been proven to thrive even during market downturns. We have empirical observations that property prices can be sustained, or even rise, during a crisis:
Notice that even through the 8 charted downturns, the price not only recovered; each peak also ended up being higher than the last (and many downturns were engineered via policy measures, they were not due to fundamental demand issues).
So if your personal finances allow, it may be right for you to buy even in 2023. For a more detailed look at what’s right for you, reach out to me at Max Properties SG, and together we can find the best fits for your portfolio.