Taking the measure of real private property price rises

Over the last 30 years, the increase was 3.9 per cent per year.

Mon, Jun 06, 2011
The Business Times

By Teh Hooi Ling, Senior Correspondent

THE price of property is one of the hot button issues in the recent general elections in Singapore. The main complaint is that prices are going up too far, too fast. When we look at the absolute price levels, yes, the appreciation appears to be rather scary.

A couple of friends sold their properties last year, thinking that prices had peaked. They've been waiting to get back onto the property train again, and were getting rather anxious as prices continued to firm in the meantime, and there didn't seem to be any signs of weakening - that is, until recently.

The new Minister for National Development Khaw Boon Wan, has made it very clear that one of his top priorities is to ensure affordability of public housing for the majority of Singaporeans.

So he has announced plans to increase the supply of Housing and Development Board flats as well as the promise to review the income ceiling of HDB buyers, a rule which has restricted the access of supposedly higher income Singaporeans to the public housing market.

These measures are expected to ease the pricing pressures in the HDB market. The raising of the income ceiling for HDB buyers will also redirect some demand for mass market private housing to the public housing market.

All these, coupled with the fact that the government is tightening its immigration policies, may suggest that indeed there is a lot of headwind for property prices to move higher.

Wild card

The unpredictable factor of course is the demand from foreign buyers. Thanks to the numerous forward-looking initiatives of the government, Singapore is today one of the more hip cities in the world. It can be considered as a global city now, one which the world's rich and famous wouldn't mind keeping a property or two in.

Given its pleasant living environment, stable government, increasingly vibrant arts scene, and steadily rising currency, real estate in Singapore is considered by many as a good store of value.

Particularly so in an era when fiat money doesn't quite inspire confidence and pays pathetically low, if not negative, real returns.

So my friend, in her panicky state after having sold her apartment and still waiting for a replacement property, asked: 'So what is the real return of property in Singapore over the years, after adjusting for inflation?'

I took it upon myself to find out. I looked at property prices in the last 30 years. Back in 1980, the URA private property index was at 33.5 points. As at end of last year, the index has risen to 194.8 points. That's an increase of 481 per cent.

But that's over a period of 30 years. What's the per annum increase? Six per cent a year. That's a moderate figure given how much Singapore has achieved in the last 30 years - having gone from a third world to a first world country.

The Urban Redevelopment Authority obtains its price index from transacted private property deals. So those are nominal prices. What if we adjust the price index to account for inflation over the years? What would the real price appreciation in the last three decades be?

Well, it's 3.9 per cent. That can't be said to be too much of a stretch. In fact, some investors might not even be too excited if a fund manager promises to deliver 3.9 per cent real return a year.

The thing is, as can be seen from the first chart, the inflation adjusted price index in the last 14 years or so has been pretty range bound.

As a matter of fact, for people who bought into the market in 1996, as of the end of last year, they have actually suffered a negative real return of 0.6 per cent a year in their property price. The sharp run up was between 2005 and 2010 when the real return was 8.6 per cent a year.

There was also a spike last year, when the real appreciation of private property prices was 14.8 per cent. This represented a rebound from the depressed pricing following the global financial crisis of 2008.

How do the figures in the Singapore real estate market compare with that of the equity markets?

I downloaded the annualised 10 year total return of seven markets in Singapore-dollar terms.

In addition to the Straits Times Index, the other six markets I looked at are S&P 500 in the US, Hong Kong's Hang Seng Index, the Kuala Lumpur Composite Index, Bombay's Sensex, Stock Exchange of Thailand and Jakarta's Composite Index. Total return includes price appreciation as well as dividend yields.

In Singapore-dollar terms, the US market is the worst performer over the last 10 years. Its return was a -1.6 per cent. After taking into account the inflation in Singapore, the real return is -3.2 per cent.

Hong Kong's Hang Seng, whose currency is pegged to the US dollar, also didn't fare too well. But at least it managed to chalk up a nominal return of 4.5 per cent a year in the last 10 years. In real terms, that's 2.9 per cent return a year.

The Straits Times Index actually did rather well, partly because there is no currency adjustment. The nominal return is 8.2 per cent a year, and real return is 6.6 per cent between 2001 and 2010. This compared with the real property price appreciation of 2.6 per cent during the same period.

Comparisons

However, we have to bear in mind that the URA index captures only the price increase and does not include rental income. The two numbers are not exactly comparable.

Of the equities markets I looked at, the star performer is the Jakarta Composite Index (JCI) which rewarded Singapore investors with a whopping real return of 24.2 per cent a year.

A $50,000 invested into the JCI in early 2001 would have grown to half a million dollars as at end of last year.

However, the moderate price appreciation numbers in the Singapore property market may not be indicative of the actual return for a property investor. Some 80 per cent of a property's price can be financed by a mortgage. And given the rock bottom interest rates, and relatively decent rental income, the return on capital from a property investment had been humongous for those astute enough to jump into the market in the last few years.

The flip side of course is that the investor is on the hook for the entire sum of the property price. Should the market tank, and tenants dry up, he or she will have to have the resources to continue to service the loans. There is a real chance of having all the initial capital wiped out.

There is also the danger of the property prices falling so much that what one owes to the bank is more than the market value of the property.

That nightmare scenario happened in the late 90s and early 2000s. There's nothing to preclude that situation from recurring if prices go all crazy again. But I don't think we've reached those levels yet. And the way the world economy is going, having a stake in real assets makes a lot of sense.

The writer is a CFA charterholder

This article was first published in The Business Times.