THE word “sustainability” commonly conjures up images of green buildings, circular economies, and recycling initiatives.

However, there is a more fundamental meaning to the word that refers to how things should be. The 2022 and 2023 cooling measures implemented by the government exemplify this underlying intention, of policy aimed at nurturing a more sustainable housing market.

Home price appreciation has clearly moderated, a dynamic that is painted and interpreted as a stride towards sustainability. However, defining the characteristics of sustainable price growth is a complex endeavour.

What is sustainable growth?

In the realm of corporate finance, sustainable growth is interpreted as the rate at which a company can expand over the long term without overstretching its resources.

This growth rate not only reflects the company’s current life cycle stage, but also underscores the appropriateness of potential strategic changes and the risks of negatively impacting future growth.

Economic literature defines sustainable economic growth as a pace that can be sustained without burdening future generations, suggesting that overly rapid growth may deplete resources and create environmental challenges for future generations.

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In the residential property market, the idea of sustainable price growth amalgamates these concepts. It is closely linked to long-term economic fundamentals, such as gross domestic product growth, household income, and prevailing interest rates.

While residential prices generally trend with the broader economic trajectory, they are also characterised by cyclical patterns of booms and busts.

These cycles are often catalysed by external factors and are influenced by market structures, including household debt ratios, supply constraints, and buyer sentiment.

Key drivers of these cycles include the supply-demand lag. Housing supply is typically inelastic, but demand shifts rapidly in response to external changes. Constraints in land supply and zoning regulations can amplify market volatility.

Buyer behaviour, often swayed by historical price trends and a tendency towards irrational exuberance, including “Fear of Missing Out”, contributes to this volatility. The level of leverage in housing finance is also a significant factor, as high unemployment levels can lead to decreased prices, adversely affecting over-leveraged developers.

These boom-and-bust cycles have profound economic and social consequences. Macroeconomically, they can destabilise financial systems and constrict economic growth. On a personal level, they create housing affordability challenges during peaks and severe financial strain during troughs.

What is unsustainable growth?

That said, rapid price increases over a short period are not the sole indicator of unsustainable growth. Such trends can also emerge in developing economies experiencing prolonged periods of price appreciation.

This rapid growth often exacerbates wealth disparities and fosters social polarisation, diverting capital from productive investments to residential properties, which inflates land prices and impedes long-term economic and housing development. In such scenarios, both developers and banks become increasingly susceptible to market shocks.

Governments confronting the challenge of unsustainable price appreciation face a complex dilemma in managing these dynamics. Implementing cooling measures to moderate market overheating can yield immediate unwelcome impacts, yet inaction poses a risk to long-term market stability.

Navigating this challenge demands a nuanced approach. Identifying a sustainable rate of price appreciation requires a comprehensive analysis of current interest and economic growth rates, contextualised within long-term demographic and economic trends.

Policymakers are tasked with balancing the immediate housing demands against the needs of future generations, carefully considering the implications of diverting excessive resources into housing subsidies at the expense of other critical areas, such as education and opportunities for the younger generation.

Achieving sustainable housing markets, despite these challenges, is a realistic objective. The correlation between long-term economic growth and property price trends suggests that strategic government investment in human capital and infrastructure should guide the market towards a sustainable growth path.

However, the importance of managing short-term market volatility cannot be understated.

Governments can bolster market resilience by maintaining prudent borrowing levels, as demonstrated by Singapore’s implementation of the Total Debt Servicing Ratio caps and additional buyer stamp duties.

Complementary measures, including the provision of public housing, targeted subsidies, and managing land supply through the Government Land Sales Programme, are instrumental in stabilising the market over the medium term.

When data lags behaviour

Having timely and accurate data to inform decision-making is paramount, especially given the significant investments involved in development projects. Implementing appropriate policies at the right time is key to facilitating smoother market adjustments.

In real estate markets characterised by supply lags, leading indicators like transaction activity, listing data and asking prices are valuable in predicting market shifts. However, mere reliance on transaction data may not always offer timely insights, given the often protracted duration from home search to purchase.

For example, analysing visitor trends to rental listings can offer earlier indications of market shifts than traditional transaction data. As data becomes more layered and comprehensive, it will enable more accurate predictions, facilitating the navigation of the housing market’s complexities. This will, in turn, assist property seekers in making informed and confident buying or leasing decisions.

Maintaining a sustainable housing market is a complex yet achievable goal. It requires a balanced approach that integrates long-term economic and demographic trends, employs a diverse array of regulatory tools, and capitalises on data-driven insights to manage short-term fluctuations and ensure long-term stability.

The overarching aim is to establish a market that not only addresses the immediate needs of the population, but also underpins the prosperity and well-being of future generations.

Tan Tee Khoon is country manager, Singapore, and Lee Nai Jia is head of real estate intelligence, data and software solutions, at PropertyGuru Group