Happy New Year and welcome to 2021!

Unfortunately the world’s economy is still in turmoil. Not only has the COVID-19 pandemic sent many industries to a grinding halt, we’re also finally in the long-dreaded recession period of the global economic cycle. Fortunately, in Singapore, we’re not hit as hard as we could’ve been. For example, our property prices aren’t dropping! In fact, in 2020, private home prices are higher than they were in 2019.

Now, I’m not saying things are great here in Singapore. They’re not. Earlier, MTI announced that Singapore’s economy contracted by 6.7 per cent in the first half of 2020 and unemployment rose from 2.9 per cent in Q2 to 3.6 per cent in Q3. We ain’t coming out of this untouched. There will definitely be some scratches and bruises.

The URA Property Index in 2020

As with previous recessions in Singapore, the property market typically takes a direct hit. We’ve seen it happen during the Asian financial crisis in 1997 and more recently in the global financial crisis of 2008. And now that we’re in arguably our worst recession since independence, we can expect the property market to be hit just as hard.

Let’s just head over to URA’s data from October which shows us that property prices are… rising?!

Yes, that’s right, in Q3 2020, the URA Property Index saw a Quarter-on-Quarter increase of 0.8%. And in Q4, preliminary estimates suggest that the increase was a whopping 2.10%!

What happens to property during a recession?

Property is the rare type of good that is both a necessity and an investment. This means that demand for property is always going to be dependent on a broad spectrum of factors.

That is not to say that it is still subject to the basic laws of supply and demand. As Economics 101 tells us, when supply exceeds demand, we get a fall in prices but when demand exceeds supply, prices rise.

In a recession, unfortunately, the need to sell property grows – a homeowner may be unable to maintain their mortgage payments due to a loss of income, or they may want to downgrade to save costs in the long-run. This will increase the supply of property and thus lead to a fall in property prices.

The first properties to go on the market during a recession tend to be investment properties. This glut in supply means that buyers have a buffet of options, so the more value-for-money properties will go first. Unable to liquidate their property quickly, those sellers facing financial difficulties will resort to lowering their selling price further to attract more buyers.

As property prices start to snowball, they will eventually cross a psychological barrier. At this crucial stage, even investors who are not as desperate for liquidity will panic, fearing that they may not be able to offload their investment properties at a suitable price. This will eventually lead to property prices snowballing.

We saw this happen in 1997 and 2008, when the URA Property Index dipped drastically.

Why did properties in Singapore buck the trend in 2020?

This sounds like propaganda, but there’s no denying that there are two main reasons why properties in Singapore aren’t as hard-hit despite a global recession and pandemic:

Firstly, the extremely generous support from the government through multiple stimulus packages (with increasingly epic names), and secondly, a workforce that remains resilient despite a high number of retrenchments and a drop in hiring.

One major source of relief for homeowners was when MAS announced that payments for all residential mortgages could be deferred until 2021. This came as a huge relief to thousands of homeowners in Singapore who applied for mortgage deferment, of which more than 90% of applications were approved.

By deferring their mortgage, even property investors relying on rental income will not be driven to sell should they not find a tenant, since they won’t need to worry about paying off their monthly home loan instalment.

This undoubtedly prevented or postponed most property sales out of desperation, thus ensuring that property prices will remain high... for now.

But property prices will fall eventually

Historically, property prices tend to fall in the quarter following the start of a major GDP contraction. This year, the number of measures the government has implemented will have some effect, but it is only delaying the inevitable.

For one thing, the current relief measures ended on 31st December 2020, and while reduced mortgage deferments were introduced in October, the policy seems clear: mortgage deferments cannot be extended indefinitely.

We can therefore expect not one but several snowballs to become an avalanche of falling property prices, most likely before 2021 ends. Fortunately, not all property types will be affected.

How will the different types of property in Singapore be affected in 2021?

So far, we have been using the URA Property Index as a representative of property prices in Singapore. There’s a reason for this. The URA Property Index only looks at private residential properties. This includes condominium units, and landed properties.

HDB flats will be the least affected. With most units being owner-occupied, we can expect that they will not be sold, even in a recession. Demand for HDB flats also remains high, as homeowners looking to sell their condos will likely buy an HDB flat from the ever-present resale market.

At the other end of the spectrum, we expect most high-valued landed properties costing more than S$3 million to be unaffected. This is because their owners will undoubtedly have the means to weather the harshest of storms and will not need to liquidate properties as a last resort.

Therefore, it is the owners of private properties currently valued between $1.2 million and $3 million who will have the most to lose once property prices drop.

What can private property owners do for now?

Whether you’re an owner-occupier or a property investor, find out if you are close to the end of your lock-in period. Many will still be on home loan packages that are above 2%.

Refinancing your home loan can help you lower your cash outflow by taking advantage of the lower interest rates available during this recession.

If you’re one of those fortunate to have the means to purchase property during this recession, then heed these words attributed to Sir Winston Churchill, “Never let a good crisis go to waste.”

There’s no better time to ensure you’re ready to pick up that property at an unbeatable price. Before you do, consult your friendly neighbourhood mortgage broker and get your finances ready and prepared for the day you pull the trigger.

The best mortgage brokers in Singapore will ensure you have:

1. your loan approval-in-principle

2. the necessary funds available for the upfront costs, and

3. sufficient cash flow to sustain your investment in the worst-case scenario where the recession lasts longer than you expect.

It is the job of a professional mortgage broker to advise you about your options when it comes to home loans in Singapore. At Mortgage Master, based on our years of experience in the industry, we know best which home loan packages are suitable for your financial situation, and whether they can save you money in the long run.

This article was first published on Mortgage Master.