The Singaporean economy has contracted throughout 2020, placing it in its worst ever recession. For the full year, the Ministry of Trade and Industry now expects a full-year GDP decline of 6% to 6.5%. Although it predicts a return to growth in 2021, with third-quarter GDP already posting a quarterly increase, it will be a slow path that is also dependent on global conditions.
Amid such economic struggles, there are still many who are asking the question – is it a good idea to buy a property during a recession?
This may be a simple question, but the answer is complex and nuanced. To begin, let’s look at the impact on the property market from the current compared to past recessions.
What Happens to the Property Market During a Recession?
Here’s the top-line economic and property market data compared to the 2008 Global Financial Crisis and the 1997 Asian Financial Crisis.
GDP
GDP is expected to fall between 6 to 6.5% for the 2020.
In 1998 the Singaporean economy contracted by 2.2%.
Unemployment
The peak overall unemployment rate was 3.3%.
The highest overall unemployment rate recorded during the crisis was 3.2%.
Stock Market
The Straits Times Index fell by about 32% from the beginning of 2020 to the bottom in March 2020. It has since partially recovered to being about 13% below its January 2020 level as of December 2020.
The Straits Times Index fell by about 52% between January 2007 to the bottom in March 2009.
The Straits Times Index fell by about 65% between January 1997 to the bottom in August 1998.
Property Price
PropertyGuru’s Property Market Index increased from 110.7 at the end of the 2019 to 112.4 at the end of the third quarter of 2020 – a slight 1.5% increase.
The Private Residential Property Price Index fell from 126.7 in the first quarter of 2008 to a bottom of 95.3 in the second quarter of 2009 – an almost 25% decline.
The Private Residential Property Price Index fell from 118.2 in the second quarter of 1997 to a bottom of 71.4 in the fourth quarter of 1998 – an almost 40% decline.
Interest Rates
The 3-month SIBOR fell from a peak of 1.7% in the beginning of 2020 to a low of 0.4% as of Dec 2020.
The 3-month SIBOR fell from a peak of 3.5% in 2007 to a low of 0.7% in January 2009.
The 3-month USD SIBOR stayed high, hitting a peak of just under 6%. However, the domestic interbank rate (today’s SIBOR equivalent) surged to over 7%.
In sum, although the 2020 recession is seeing higher GDP declines and unemployment rates compared to past recessions:
- Private residential property prices have increased slightly instead of drastically falling; and
- The stock market has fallen by a much lesser amount, with a much quicker recovery
The reasons for these were likely because:
- Central banks have injected trillions of dollars of liquidity into financial markets, much of which has flowed into stocks
- The growing tech sector has thrived amid work-from-home and social distancing measures
- Low interest rates, which have persisted since the Global Financial Crisis, are positive for both stock and property markets
- The 1997 Financial Crisis also sparked a currency crisis, making things even worse. This has not been the case this time around, with the Singaporean dollar actually strengthening against the US dollar
- The 2008 Global Financial Crisis originated from the financial and real estate sector
Now that we’ve seen how this recession is different from the others (including how both the stock and property markets have fared far better), the question is…
Does This Mean the Current Recession is a Good Time to Buy Property?
Here are a few general pros and cons for people considering whether to buy property during a recession.
Pros
- Cheaper mortgages. Since the Global Financial Crisis, central banks have responded to economic downturns by lowering interest rates – which leads to cheaper mortgages.
- Better bargains. Higher economic uncertainty generally means lower competition and potentially desperate sellers, which could lead to better bargains.
- Higher future returns. The lower your purchase price, the higher your future returns (as the purchase price is the denominator).
Cons
- Prices may fall further. This the classic “market timing” dilemma. Although property prices may fall during a recession, they may still fall further after you buy them.
- Lower rental income. Good rental cash flows may be harder to come by during a recession.
- Higher personal risk. A recession also impacts the job market, meaning the chances of you losing your primary source of income is higher. This makes buying a property a riskier proposition.
- Harder to sell your current home. If you need to sell your current property to purchase a new home, you may find the market unconducive. This may force you to lower the selling price.
- Potentially stricter lending requirements. Banks may be more cautious during recessions and they may be more cautious when lending.
While these are all valid and should be taken into consideration when deciding, remember that personal finance is personal. That means the correct question to ask is…
Is It a Good Time for Me to Buy Property? (6 Questions to Ask Yourself)
Everybody’s situation is unique. For one person, it may be a great idea to buy a property during a recession. For another, it may be a terrible idea. Here are six questions you can use to better gauge your own situation.
1. Why am I buying?
Be clear about why you want to buy during a recession. Is it because:
- You wanted to buy a new home anyway and can now use the recession to get a better deal?
- You think it creates a better investment opportunity?
- You think a recession means it is “automatically” a good time to buy?
If it’s the first, you’re probably good to go. If it’s the second, we urge you to really run the numbers first. And if it’s the third – then it’s probably not a good idea.
2. How leveraged am I?
The more leveraged you are, the greater your personal risk. And remember that buying during a recession is inherently riskier. If you are already significantly leveraged, think twice about whether you want to – or can handle – adding even more risk.
3. How much cash do I have on hand?
Conversely, the more cash you have on hand, the lower your personal risk. If you have enough to comfortably pay for the downpayment without affecting your emergency fund, then you are in a better position to consider buying during a recession. But if you don’t even have an emergency fund – it is best to reconsider your priorities.
4. How “recession proof” is my career and industry?
Data shows that unemployment always spike during recessions. Losing your job right after closing on a home is a worst-case scenario that you should seek to avoid at all costs. This means stepping back and objectively assessing how your career, your company, and your industry would fare in a recession. If cutbacks happen, how likely are you to be spared? Again, the more “recession proof” your job is, the lower your current level of personal risk.
What Happens To Your Mortgage If You Lose Your Job?
Read more here.
5. How much margin of safety will I have post-purchase?
The more margin of safety you will have after a purchase, the lower your risk. We’ve already discussed this topic extensively, so we won’t go in-depth here. However, don’t forget that you also have to factor your likelihood of your job being affected by a recession when making this assessment. In times of recession, it’s prudent to not blindly assume that you can definitely maintain and grow your current earnings over the next few years.
6. Would I be better off refinancing my home loan instead?
After going through these questions, you might conclude that buying is not a good idea. Or maybe you were never looking in the first place. Either way, if you already have a property, you may want to seriously consider refinancing your home loan instead. Interest rates would likely be lower (as they are now), allowing you to save on your monthly cash flows. This will lower your personal risk – highly valuable during volatile times. Read this refinance checklist to find out if it’s a good time for you to consider.
Buying During a Recession – An Opportunity for Some, a Bad Idea for Others
As we said earlier, the question of whether it is a good idea to buy a property during a recession doesn’t have an easy “one size fits all” answer. A recession may be a good opportunity for some, but a terrible idea for others. It all depends on your personal situation, and we hope that the discussion here can help you make a more informed choice.
But if you are still unsure and want more personalised advice, simply reach out to our home finance advisors. You can tell them about your goals and circumstances, and they can advise you accordingly. Otherwise, you can read the rest of our Home Financing Guides for more information on all aspects of home financing.
For more property news, content and resources, check out PropertyGuru’s guides section.
Looking for a new home? Head to PropertyGuru to browse the top properties for sale in Singapore.
Need help to finance your latest property purchase? Let the mortgage experts at PropertyGuru Finance help you find the best deals.
This article was written by Ian Lee, an ex-banker turned financial writer who hopes to use his financial background and writing skills to help raise people’s financial literacy levels – a necessity in our modern world.
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