Key considerations for owner occupiers and investors

DEFYING an unprecedented global pandemic, the Singapore residential property market has grown from strength to strength. Last year, private residential property prices rose by 10.6 per cent while transaction volumes rose to over 33,000 units, the second-highest year on record after 2012.

The unabated growth of the market, coupled with vulnerabilities in various sectors of the economy and impending interest rate hikes, prompted the authorities to tap the brakes with new cooling measures in December last year.

During Budget 2022, property tax rates were hiked for all non-owner occupied residential properties, while owner occupied properties with an annual value of over S$30,000 would also see higher tax rates.

The latest policy moves beget the questions: where is the property market headed and the implications for owner occupiers and investors.

Our view is that the overall property market is fundamentally healthy and remains on sound footing. The formation of new households, organically or otherwise as borders open, will fuel genuine demand for living spaces. The pandemic and the rise of hybrid working have accentuated the premium on individual living spaces.

In our view, financing conditions will remain largely affordable. The majority of buyers are first-time buyers who are not subject to the more hefty additional buyer stamp duty (ABSD) rates and can still avail themselves of mortgages with up to 75 per cent loan-to-value (LTV) limit, and fairly low interest rates. The higher property tax rates are not prohibitive in our view too and do not impact the market significantly.

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National housing policy

While there are clearly different considerations for owner occupiers and investors, one cannot deny the strong influence of the national policy. The sound legal framework and transparent nature of the property market here have always been strong plus points and we expect the authorities to continue to ensure a level playing field for all players and improve consumer protection. It is clear that major disruptive boom-bust cycles are eschewed by the authorities and regular pre-emptive moves to guide the market towards a sustainable path should not be surprising.

Besides ensuring affordability, the inclusivity agenda also shines through with the numerous living options encapsulated in the government's Master Plan and more recently, the introduction of the Prime Location Public Housing model, to mitigate social stratification. Other clear themes include enhancing the transport network to facilitate decentralisation while transforming the downtown to a 24/7 work-live-play destination.

Owner occupiers

Buying a home for own stay, especially one's marital home, can be a complex and emotional process. The age-old adage applies: location, location, location. Consider your needs and preferences. Is a central address critical for proximity to town or would a less central location surrounded by amenities and green spaces be preferred?

Depending on the family structure and stage of life, proximity to education institutions, employment clusters, or parents' residences could also feature with varying levels of importance. If views matter, say, seafront or riverfront views, then clearly only a subset of locations would qualify.

Besides the location, the design and features of the project should also weigh in the decision matrix. The theme and design of the project are subjective. While some may favour having more facilities, this could mean higher maintenance costs; alternatively the size of facilities may have to be scaled down. Nonetheless, communal spaces such as libraries that offer respite, yoga/meditation rooms and breakout rooms are likely to be well received.

Between 2 competing projects in close proximity to each other, it is not uncommon for buyers to gravitate to the one with lower pricing. However, as the purchased unit is for long-term occupation, other intrinsic factors should also be taken into account beyond, say, a saving of S$50,000.

For instance, one may place a premium on abundant greenery within a development, or favour a mixed-use project that complements one's desired lifestyle. As work-from-home becomes a norm, features like balconies, great views or green spaces are increasingly coveted. Needless to say, the track record of the developer is an important metric too.

On whether to opt for a new unit from the developer or one in the secondary market, it largely boils down to the family's space needs. For any given budget, older developments offer more bang for the buck in terms of living space. Nonetheless, newer projects are generally able to achieve excellent space efficiency and incorporate modern designs and facilities.

A practical consideration, especially in light of the spate of pandemic-related construction delays, is physical availability of the home. Homebuyers with little or no pressing need for immediate availability can also avail themselves of projects under construction while those in need of urgent shelter are restricted to only the secondary market. Unsold completed inventories of developers are quite limited in this climate though.

Last but not least, an important consideration for homebuyers is the exit strategy. This is often overlooked, especially for young families purchasing their marital homes, as homebuyers envisage that it would be a happy-ever-after home amid the swelling of emotions. Reality is not quite the same though.

Homebuyers should be cognisant of their family-planning needs and retirement/legacy considerations down the years. Ideally, there should be a mental marker that the new home would be occupied for a certain duration before the next considered move to upgrade or downgrade the residence.

Investors

The purchase considerations for investors are quite different from those of owner occupiers. While some of the factors discussed earlier like location, convenience and proximity to schools have an important bearing on the rental market, the serious property investor needs to separate his financial analysis from other subjective considerations like the project design, features or accorded lifestyle.

From a big-picture perspective, Singapore's macroeconomic fundamentals as well as its political stability and rule of law should lend assurance that the city-state remains an attractive property market. With the aid of strong fiscal resources, Singapore's economy rebounded strongly last year after a short-lived recession.

The impact of the recent cooling measures, in relation to higher ABSD rates for any residential property purchases by foreigners and the second and subsequent purchases by Singaporeans and permanent residents (PRs), needs to be examined against the context of the investment objective and horizon.

For most investment properties, the higher property tax rates could shave up to 1 percentage point off the net rental yield. In reality, a reduction of 0.5 percentage point or less is the likely scenario for most investment properties with an annual value of, say, S$40,000 or less.

On one hand, investors motivated by capital appreciation are likely to exercise more caution and/or extend their horizon to achieve a target return. On the other hand, investors who are yield-focused are more likely to take the reduced investment yield in their stride if it meets their thresholds and provides diversity to their investment portfolios. The near-term rental outlook is also promising as more expatriates, students and foreign workers are expected to return to our shores.

Understanding the key economic agenda of the government can help the investor to identify property growth areas to increase the odds of investment success. In line with the national decentralisation strategy, regional centres are poised to grow and generate further employment opportunities and housing demand. Similarly, towns with new public housing projects in the pipeline will see the birth of upgrading demand after the 5-year minimum occupation period has been fulfilled, which is a boon as one considers the exit potential.

Financial prudence

It is apt in this article to advocate financial prudence in an environment where a global pandemic is still raging and where technological disruptions continue to upend jobs and threaten wage security. While some might eschew taking a hefty loan by making a large downpayment with their existing savings, it is nonetheless more prudent to ensure a sufficient buffer of liquid assets to cover the mortgage and living expenses during rainy days.

It is widely held that interest rates will rise significantly in the coming months to curb global inflation. Whether one should opt for fixed or floating rate packages, it really depends largely on the strength of one's conviction on rates, the risk appetite, and the economic resilience. For greater peace of mind, borrowers should take a mortgage that they can comfortably service - not by overstretching their cash reserves on the downpayment but by setting firm budgets for their home purchase.

Good time to hunt

Post-cooling measures, we remain sanguine about the local property market given its healthy fundamentals. The slower pace of home price inflation in the months ahead offers owner occupiers and investors a good window to hunt for their ideal property before prices pick up more fervently.

Looking at the recent land purchases and redevelopment activity, homebuyers will be spoilt for choice this year given the plethora of upcoming project launches which include downtown and city-fringe options as well as living in mature housing estates and integrated mixed-use developments.

Lam Chern Woon is Head of research and consulting at Edmund Tie & Company (SEA).