Monday, 22 May 2023

Presence of So Many Foreigners in Singapore is to Protect Overleveraged Property Investors

Besides the need for labour to supplement the ageng workforce, another reason why many foreigners are present is to support the property market in Singapore. Without the continous growth of foreigner numbers while Singapore has overbuilt in the housing market, there is a high probability scenario that property prices in Singapore will fall drastically over the next years; hence more foreigners are needed to support the property market.

[A] Foreigners - the Rental Demand that Supports the Property Market

Due to a combination of ABSD and housing policies as well as the nature of foreign workers where many stay in Singapore temporarily before returning, they rent for their housing needs.

Singapore's House to Population Ratio has Fallen to the Lowest in History

In 2017, Singapore no of people per house rate fell below 4 for the first time and stood at 3.96.

5 years on, the ratio has fallen further and at an all time low in the country's history (3.69) 

Sources: Data from HDB, URA, Singstats

One would notice the resident population (Citizen + PR) grew only 100,000 over the past 5 years. On the contrary, housing units grew by 112,000 units (7.9%) for the same period. While this alleviates the housing crunch in 2018 and before, the reverse has happened, there is now a high vacancy rates in Singapore housing market, property investors are holding empty units in the hope of selling for a higher prices than they had bought (after all they were promised by housing agents that Singapore property prices will appreciate). Potential home owners are turned off by it as their income is not high enough to meet the high asking prices.

In current reality, what Singapore suffers from is not a housing crunch; instead what we suffer from is the lack of accessible affordable housing for citizens.

Secondly, individuals (property investors) are purchasing second or third houses, using it as rental income as part of their investment plans. This is similar to the concept of REIT investing and a marketing tactic used by property agencies. Hence many more houses (both private & public) are now used as investing purposes instead of forming a home

[B] Supply Pipeline

To combat the lack of accessible affordable housing, the government has announced increasing BTO supplies at 20-21k units a year. In 5 years, we are looking at 100,000 more HDB flats.

Based on URA stats, over the next 4 years, we will see 46,000 units of EC + condos being completed. 

This means 146,000 new units in 5 years time.

[C] Private Housing are not Yield Accretive

Even with sky high rentals, property investors are seeing a 3.8-4.2% yield from renting out condos based on current market conditions. A housing loan is currently offered at the 4.0-4.5% interest range as SORA rates are now at 3.6%.

What this means is that owning and renting a condo is no longer yield accretive; with leverage, people are only earning 4.2% or less; with few investors earning much lower because interest rates are higher than their condo rental yield. People are proftting off from capital appreciation instead.

The exceptions have been the HDB resale market due to the ability to tap on HDB housing loan rates of 2.6%.

If foreigner inflow which spurs demand do not pick up while supply in part (B) kicks in, it becomes a renter market and lower yields will be witnessed by property owners. With lower yield and a higher interest expense, existing property owners will face capital loss and a risk of margin call as they breach regulatory limits for loans (reminder of what is happening to Manulife US REIT and other US commercial REITs)

[D] Protecting the Leveraged Property Investors

A falling housing market prices is not ideal to the government of Singapore now. Take a look at present day China where housing prices took a tumble. Despite reopening from COVID, china retail sales growth is at less than 10% and many are not spending because they are hampered by (i) high housing loan servicing obligations, (ii) lack of a foreigner pool to rent to and (iii) the Chinese renters being able to command lower rents now due to the oversupply of houses.

Singapore faces the same problem now and it will not want to see rental prices falling. While Singapore can lower interest rates to cushion the pain of servicing a house loan, there is a limit on how low rates can go given we are price takers.

With supply at 146,000 new units over the next 5 years, the only way to meet this supply is to spur rental demand, otherwise a cascading downward effect will hit property investors owning their second/third and more homes.

Unfortunately, with the resident population growing at 100,000 over 5 years, it is insufficient to cover the upcoming supply. Using a ratio of 3.5 individuals to 1 unit, Singapore needs a growth of 510,000 in population to meet the impending housing supply. This means 400,000 more foreigners, which equates to a 25% growth over the next 5 years. 

I will not be surpised that by 2027, Singapore crosses the 6 million population, with a marked increase of foreigners. This to protect property investors.

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