Are Current Events Likely to Result in a Property Market Correction?
At the recent National Trades Union Congress May Day Rally, Prime Minister Lee Hsien Loong made the comment that
"Singapore must transform for 'troubled environment', with risk of global recession in next two years"
This is a result of a confluence of factors involving the Ukraine-Russian war, inflationary pressures arising from oil prices, supply chain disruptions and rising interest rates.
At this juncture, it is premature to foresee the severity of a recession, if any.
However, and perhaps against intuition, the probability of major global conflicts and rising interest rates resulting in a property market correction are low based on historical data.
Here, we will take a further look at market correcting triggering events since 1990 and discuss why the current state of events seem to differ in characteristics to previous market correcting events.
As observed above, in the 6 instances of a market correction, 3 stemmed from financial and equity market triggers, 2 were virus triggers and 1 was internally triggered via severe cooling measures.
Thus far, no historical property market corrections were triggered by global conflict, rising interest rates or inflation factors.
At the same time, the following factors will cause prices to remain elevated despite recent global events:
1) High Labour and Materials Cost
Higher labour and raw materials costs will likely keep construction costs and supply side costs high in the current high inflationary environment, negating the potential short term weaknesses in sentiments.
Such cost pressures are not actually new. The Covid pandemic has already delayed construction which lead to the unintended increase in building expenditure.
The Ukraine-Russia conflict has now caused more uncertainty in terms of material pricing and delivery and this now has a direct impact on developers' bottoms line which they will then have to pass on to the end consumers.
2) Lower Unemployment Rates
Overall tight labour markets, low unemployment rates and record low retrenchments are keeping the COVID recovery on track and likely to result in increased consumer spending and improvements in local market conditions.
3) Returning Foreign Investors
With the gradual resumption of travel across the globe, we will start to see the return of foreign buyers to the Singapore property market.
In fact, the past two years have shown that we have a stable government and a reliable and capable system to deal with such 'black swan' events.
With the political stability and low mortality rate from COVID, the influx of high networth individuals setting up family offices and making Singapore their home is set to rise with the opening up of travel.
This will definitely have a positive impact in the mid to long term.
4) Healthy Household Balance Sheets
Over the years, the household networth has been growing steadily.
As household balance sheets have experienced steeper growth trajectories over the years, a higher degree of robustness exists in our financial systems today. This will help to maintain price stability and lessens the potential for sharp corrections.
In addition, the property cooling measures implemented throughout the pass 10 years have help to put in place a level of financial prudence which lessens risk to a sustainable and healthy level.
Undeniably, market correcting events can bring about sudden shocks which consequently resullt in rapid weakening of sentiments.
However, in my view, current events such as rising interest rates and monetary tightening policies, peaking levels of inflation and global major conflicts typically unfold slowly. This can be seen from the US government giving more than ample notice of wanting to raise interest rates as well as the gradual escalation of the Ukraine-Russia situation.
This gives the market sufficient time to mitigate shock waves and enable governments to take pre-emptive measures.
Therefore, in the event of a recession, I do not expect property prices to correct sharply due to a number of foreseeable factors such as a return of foreign demand, high employment rate, increasing labour and raw materials costs, low upcoming supply and a much stronger household balance sheet.
As such, we should maintain a neutral to bullish outlook on the market moving forward.
Hope this helps to give more clarity and as always, happy to have a more in-dept discussion!