What's Up With The SG Property Market?

In recent times, the SG property market has been a hot topic. What's going on?

In this post, causal loop diagrams are used to capture the essential dynamics of the market. As the word "causal" implies, A causes B if an arrow goes from A to B. The '+' sign means A and B increase or decrease in the same direction, while the '-' sign means A and B change in opposite directions. 

There's a lot to say, but here's my little two-cents. 

An Ideal World

(Credit: Sterman, 2000)

Demand

In an ideal word, an increase in price leads to a decrease in relative value (i.e. it's too expensive). When people think it's too expensive, demand drops and the price falls accordingly in a counteracting manner.

Supply

An increase in price leads to an increase in profits, which in turn leads to an increase in supply that will moderate prices. Like the demand loop, the supply loop balances the price. However, developers take time to build new properties. Due to this delay (i.e. double line on the red arrow), price may increase for a while before stabilizing. 

Why Is Everyone Flocking To The SG Market?

In recent times, interest rates have been extraordinarily low. The low interest rates have increased the buyers' ability to service their loans across the board. With the lower cost of borrowing, buyers also expect higher returns on investment (ROI). The lenders' desire to profit has increased the ease of financing. All these factors depicted in blue have caused demand to surge. I would argue for both locals and foreigners alike. Remember the delay for supply side to catch up. 

Red Hot Property 

A red hot SG property market is the consequence. As more properties are sold, more profits are earned. Developers want to build more properties to reap handsome profits; buyers want to take advantage of low interests to increase their ROI; lenders want to give out more loans to make money; sellers want to sell their properties when the time and price are right. A property bubble (depicted in green) starts to form. 

What If It Goes On Like That?

Just like our Earth's resources are limited, prices cannot grow forever. Buyers, sellers, developers and lenders understand that, but everyone wants to gain something right now. If you purchase a property for S$1M and take up a S$0.8M loan, your monthly payment is about S$2,700 now. If interest rates shoot up to 5%, you pay about S$4,300 per month. What happens next? (depicted in red)

- Some buyers will not be able to service their loans. 

- Increased rates means higher costs of borrowing and lower ROI for buyers, and thus lesser property demand.

- The number of default cases will increase, leading to foreclosures which will gradually increase market supply and decrease prices.

- The lenders' financial health will deteriorate slowly. More often than not, it's usually too late when lenders start to tighten their loan approvals, as evident in previous property meltdowns.

- The dangerous delayed effects of supply and lenders' financial health will eventually cripple the property market and the broader economy if left unchecked. 

Food For Thought

Can we stop people from flocking to the market to take advantage of current circumstances? Can we stop the formation of a property bubble? Without some form of intervention, it's very difficult with the high levels of human ingenuity when everyone tries to outsmart one another. 

Interest rates are hard to change for the time being, and for some time to come. Intervening by adjusting the ROI and the ease of financing seems most logical. Can you think of other ways?

Last but not least, don't focus so much on the immediate gratifications and impacts. Think deeper. Think longer term. Don't overstretch yourself. Interventions today may be good in the long run.

Thanks very much for reading.

Here is an interesting read from The Economist. 

Works Cited

Sterman, J. D. (2000). Business Dynamics: Systems Thinking and Modeling for a Complex World. USA: Irwin McGraw-Hill.