By David Dickinson
Property and listed stocks are two vastly different instruments. However, there are several instances when stock price movements can be a useful leading indicator of private property prices. One such example is following events that lead to major economic contractions, like after the Asian Financial Crisis (AFC) of 1997 and the Global Financial Crisis (GFC) in 2008. If we look back on these past recessions, will we find some clues on what to expect in the private housing market during the COVID-19 pandemic recession this time?
Asian Financial Crisis (AFC), 1997
The AFC had a big impact on Singapore’s property market. Following the collapse of the Thai Baht in July 1997, housing prices in Singapore fell by 4.4% in the same quarter, 8% in six months and a total of 40% over 18 months. And that was after the market had already eased thanks to the cooling measures introduced by the government in early 1996, before the AFC.
In comparison, Singapore’s stock market fell by about 60% and bottomed about 12 months after the start of the crisis. The property market did not fall as quickly or as much as the stock market and hit its bottom about six months after the stock market had started to finally recover.
Global Financial Crisis (GFC), 2008
The GFC had its roots in the US housing market, and while growing concerns over mortgage backed securities affected the US stock markets from 2007, it wasn’t until the collapse of Lehman Brothers in September 2008 that the panic spread to the financial markets, and Singapore’s housing market was impacted.
The Urban Redevelopment Authority (URA) Housing Index fell by 2.4% in the third quarter of 2008 and within six months had fallen by about 8%. In total, prices dipped by about 25% over a year before we saw a recovery.
In comparison, Singapore’s stock market fell by about 40% following the Lehman Brothers collapse before starting to recover six to seven months later. Like in the 1997 AFC, housing prices seemed to reach their bottom about six months after the stock market had finally bottomed.
How has the COVID-19 pandemic recession impacted housing and stock prices so far?
So far, the impact of COVID-19 on private housing prices has been minimal with the URA Index falling by less than 1% since the start of the year. Other property indices are also rather stable. For example, the PropertyGuru Property Market Index revealed a 1.1% dip in private property asking prices in the first quarter of the year, but then rose by about 2.2% in the second quarter.
On the other hand, the stock market fell to its lowest point of the year when it was down 29% on 23 March, before recovering slightly, closing the same quarter down by 23%. It recovered more in the second quarter of 2020 but has since slipped and is now down about 21% since the start of the year.
It’s also interesting to look at what has happened to Singapore’s listed S-REITS. They could be a better indicator than the wider stock market because they consist of income-producing properties. S-REITs have outperformed the wider stock market with the iEdge S-REIT Index down by only about 8% (start of the year to 14 September).
This could be good news for residential property, but we must remember that the S-REITs sector contains virtually no housing, and the relationship between the performance of commercial and residential property is not always strong. Also, a lot of the properties held by S-REITs are outside Singapore. Nevertheless, price support for the S-REIT sector is encouraging.
What might this mean for Singapore’s private housing market?
If 23 March was indeed the bottom for the stock market does that mean housing prices should start to turn positive from about October assuming a six-month lag?
However, if the path to economic recovery remains uncertain, sentiment is likely to keep the stock market subdued and the housing market may continue to weaken in coming months. Following that, if we use the stock market as a yardstick and assume that the worst is over, the extent of overall price falls could be relatively modest.
It’s worth noting, as well, that the movements in housing prices in comparison to stock prices through the AFC and GFC were also greatly influenced by the characteristics and conditions of the property market through these events and in the lead-up to them.
At the time of the AFC, private housing supply had been rising strongly, up over 15% in 1996 with an overhang of new, unsold inventory emerging and vacancies climbing in the private housing market. Also, foreign buying (excluding PRs) of non-landed private properties dipped from about 12% before the onset of the AFC to around 6% after. Buyer activity was further dampened by rising interest rates in 1998.
In the lead-up to the GFC, new private and public housing supply had been very low. This contributed to low vacancies and strong price growth in 2006 and 2007. There was also a surge of foreign buyer and speculative activity.
Following the GFC, massive quantitative easing globally helped sow the seeds for housing price booms in countries less directly impacted by the GFC, and Singapore was no exception. Prices in Singapore took off in 2009 along with a resurgence of foreign buying. Furthermore, from 2009 to 2011, the number of foreigners working here on Employment Passes increased by 55%, supporting a strong recovery in the rental market.
What is happening in the Singapore housing market now?
So, what is different this time around? Well, in 2019, foreign buyers made up a relatively low 6% of all non-landed private home purchasers compared to over 14% immediately before and after the GFC. This, no doubt, has been due to additional stamp duties (ABSD) that have been in levied since 2011 that have also contributed to prices being fairly stable since 2013. This probably also means downside risks for prices are less than through the GFC and AFC, though we can’t say this for certain until there is more clarity on the path to economic recovery.
Looking forward, with ABSD controls still firmly set to “curb exuberance” it is hard to envisage a strong surge in prices even when conditions improve.
Also, conditions in the rental market are likely to be less robust than following the GFC. In the first seven months of 2020, the number of Employment and S-passes fell by 22,000 or almost 6%. In comparison, employment in these categories increased in 2008.
In 2019 developers started to voice concern about the possibility of a private housing supply glut because there were some 35,000 unsold units under construction and new project launches were also rising. There was a rise in launches in 2019 to almost 11,350 units from a low of 6,000 in 2017 but because there is a lag of about four years between the start and completion of projects it’s not all bad news for the market at the moment. Because launches fell to a cyclical low in 2016, the completion of new stock is now low and COVID-19 disruptions to the construction industry will presumably limit them more in the near term. This should help limit the increase the total stock of housing units and thus a rise in vacancies.
So, can we use the stock market to reliably predict housing prices?
In conclusion, the stock market may give us some clues as to movements in housing prices following major events, but not the full picture. For that, you need to overlay conditions in the property market as these will ultimately determine the extent of changes in prices and rents. Stocks on the other hand, might be better used to help determine turning points for prices and rents. Till next time.
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