Housing Market Developments
Over the past year, I provided technical expertise to the Grant Thornton-Dhalia collaboration for the development of Selling and Rental House Price Indices and more. An abridged version of the report is accessible here. Below are the salient points.
Following rapid growth in the five years leading to 2019, between 2020 and the early months of 2022, the selling price for the average housing unit increased at a relatively slow pace. In contrast, rental prices had already declined by an average of 16% when 2020 is compared to 2019 and remained at that level in the first six months of 2021. Subsequently, rental prices started to increase but, in the first half of 2022, they were still 10% lower than pre-COVID-19 levels. The relatively stable house prices and declining rental rates suggest that property investors believe the dip in rental prices to be temporary.
In fact, in 2021, the number of final deeds of property sales and promise of sale (POS) agreements increased back to pre-pandemic levels. In part, this also reflects transactions spilling over from 2020 due to delays caused by COVID-19 as well as purchases that were brought forward from 2022 due to the anticipated expiry of the stamp duty exemption on property that the Government had introduced as part of its COVID-19 economic recovery plan.
Nevertheless, medium-to-long-term outcomes in the housing market will be dictated by user demand and supply. User demand turned negative in 2020 – partly due to a significant drop in tourists staying in rented accommodation – but increased by almost 5,700 in 2021. This reflects additional demand for housing units by first-time buyers and a growing foreign-born population. During the same year, the number of tourists seeking short-stay accommodation in housing units recovered only partially from the drop recorded in 2020.
The estimated additional housing stock for 2020 and 2021 amounted to 9,381 and 9,487, respectively, reflecting the large number of units approved by the PA in 2018 and 2019, that typically come onto the market with a time lag. This means that, in 2020 and 2021, additional housing supply by far outstripped additional demand, thereby putting downward pressure on prices.
The outlook for the three years ahead (2022-2024) foresees a slowdown in additional housing supply and recovering housing demand. These developments are expected to ease but not eliminate the downward pressure on prices; particularly because the estimated additional demand may not suffice to fully meet the supply of housing units that would have been accumulated by 2024.
The outlook is complicated by international developments that have impacts the global economy. In particular, the cost of raw materials used in construction has soared, and interest rates are rising in response to high rates of inflation. These developments will impact house prices as construction and borrowing for first-time buyers and investors becomes costlier. The future of the housing market is challenging.
Such developments do little to alleviate concerns about housing affordability. In 2021, the average two-young-adult household had a borrowing capacity that translates into a maximum affordable house price that only marginally exceeded the market price for an average-sized housing unit (assumed at 115 sqm). The comparable figure for the median one-young-adult household fell significantly short of that market price. For the one-young-adult household, the gap between the maximum affordable house price and the market price has widened significantly, especially since 2017. Over the same period, the gap between the market price and the maximum affordable house price for the two-young-adult household has narrowed such that the average-sized housing unit is just affordable.
Similar conclusions are drawn from the analysis of anticipated cashflow from rental income. We find that the market price of the average housing unit is very close to its fundamental price, i.e. the value that would be justified by the anticipated rental income. This is based on the rental price that prevailed in 2021. Whether such rental price can be sustained over time depends on the various factors that influence demand and supply.
