Is a slowdown really coming? And what will happen to property prices?


You’ve read the news. Covid-19 is still here. Monkeypox has even joined the party. There’s a war between Russia and Ukraine. An energy crisis is happening. Food and oil prices are rising.

Now headlines in the U.S. are fraught with predictions about an imminent recession—one that’s highly likely to happen in 2023.

And what happens in the U.S. doesn’t just stay in the US; it comes uninvited to national shores, much like the Covid-19 virus.

Suffice to say, the health of the global economy isn’t in its best state right now.

In June 2022, U.S.’s Consumer Price Index (CPI) rose by 9.1 percent from last year. What’s significant about this is that it’s the largest increase since November 1981.

Simply put, inflation is happening fast and it’s not getting better.

To counter the ongoing inflation, the US Federal Reserve has been hiking up interest rates as part of an aggressive measure.

While high interest rates can help to curb consumer spending, when it’s not well controlled, the economy can contract quickly and trigger a recession.

In fact, economists from Bank of America are expecting a mild recession to happen in the remaining quarter of 2022.

With the U.S. economy still far from out of the woods, will the dark clouds of recession also hang over our heads in Singapore?


What does recession mean?

Recession means the economy, measured by a country’s Gross Domestic Product (GDP), has shrunk for six consecutive months.

If you recall the infamous Global Financial Crisis in 2008, it was catalyzed by the housing bubble burst, i.e., a plunge in housing prices, and a financial crisis in the U.S, which led to the Great Recession.

This crisis spilled over worldwide and Singapore experienced a significant drop in housing prices. The Urban Redevelopment Authority (URA) Housing Index recorded a fall of 8 percent within six months.

Given that the housing market is deeply tied to the economy, it’s to be expected that the property market will be impacted should a recession come.


How will the recession affect the property market in Singapore?

A recession typically entails financial instability, job losses, a higher rate of unemployment, and so on.

Theoretically, you can expect property prices to drop since people are less likely to buy a house during such periods of uncertainty.

When demand falls, there is less value to goods, which leads to decreasing prices.

Contrary to this, property prices did not plunge during the 2020 pandemic recession.

Quite the opposite. Property prices rose on the overall level.

According to a report by Channel News Asia, “Property markets around the world saw an unlikely boom during the worst economic fallout and health crisis in living memory”.

In Singapore, private home prices dipped slightly but quickly recovered. It even “increased by 2.2 percent last year despite the COVID-19 pandemic”.

Unlike the GFC in 2008, the pandemic recession was not directly caused by variables such as the housing market.

And the property market has proven itself to be quite resilient despite the recession.

This goes to show that the nature and variables involved in each recession are different. And correspondingly, the property market is affected differently.

Property Prices Expected to Rise

Straits Times reported that “private home prices rose 3.5 percent in the second quarter” of 2022.

This was “five times the 0.7 percent increase in the previous quarter” according to CNA.


And we can actually expect property prices to continue rising regardless of the upcoming recession.

Why? Let’s take a look at the conditions and variables happening at present.


1. Cost-push inflation

What is cost-push inflation?

If you haven’t already noticed, we’ve been experiencing cost-push inflation in recent years. Remember when chicken rice became expensive because of rising chicken prices?

That’s cost-push inflation. It occurs when production costs, for instance, raw materials, transportation, wages, etc., increase.

When the cost of labour and/or raw materials go(es) up, prices for goods and services increase in order to make up for the higher production costs.

Consumers have to pay for the same goods and services at a higher price.

Another good example is the current surge in oil prices due to the Russian-Ukraine war. This resulted in the rise in petrol prices.

In short, rising prices that are driven by higher production cost is known as cost-push inflation.

Cost-push inflation has been happening globally and the property market is not spared from it.

Thanks to the pandemic and the Russian-Ukraine war, supply chain disruptions have made raw materials for building more expensive. The price of steel skyrocketed in 2021; needless to say, construction costs experienced a spike.

Besides the already high land costs in Singapore owing to land scarcity, developers have to grapple with higher construction costs.


It is also unlikely that developers will decrease their profit margins given the surge in production costs. This would then translate to higher launch prices for those looking to buy a house, and concomitantly, rising property prices despite a looming recession.


2. Limited Supply of Homes


Working hand in hand with cost-push inflation is some semblance of demand-pull inflation that we are witnessing right now in the property market.

This sort of inflation happens when demand far exceeds supply, so prices get pushed up.

Nobody could have foreseen the high demand for flats during COVID-19.

And this demand has remained relentless amidst supply chain disruptions.

This is partly because although cooling measures like the higher ABSD rate may discourage people from buying properties, it only directly targets foreigners and developers.

It doesn’t have any bearing on those who are looking to buy their first home.

The high demand for housing is mostly driven by first-time buyers and those looking to upgrade their HDBs.

Now let’s look at the supply side of the property market. An important variable that contributed to the continuous rise in property prices is the low housing supply.


In the two preceding years before Covid-19, the Government Land Sales (GLS) Programme brought about moderation in the land supply. This would consequently mark a decline in land availability when Covid-19 hit alongside the strong demand for housing.


Although the Housing Development Board (HDB) has plans to “launch up to 23,000 new Build-to-Order (BTO) flats each year over the next two years” as reported by Channel News Asia, a key point to note is that the impact, that is, the increase in supply, would not happen any time soon.


Furthermore, there have also been delays in housing projects, which would slow down the process. This would directly affect the rate of housing supply.

With a multitude of variables at play such as the unanticipated surge in housing demand during COVID-19, the supply chain disruptions, and delays in construction progress, the current supply of houses is unable to cater to the high demand.

And so, the value of houses increases and so do property prices.


3. There’s Too Much Money in the Market


In countries like the U.S., monetary and fiscal policies were adopted to mitigate the negative effects of the pandemic and to tackle monetary inflation.

In simple terms, the U.S. increased the supply of money circulating in the economy, $5 trillion to be exact. And when there is too much supply of money, this creates a situation where the money supply exceeds the country’s ability to produce goods and services.

So, say an economy has $500 and it produces 500 apples.

This means each apple would cost $1 per person.

Now you increase the money supply so there’s $1000 in the economy. But the number of apples remains at 500.

An apple will now cost about $2.

Previously $2 could have gotten you two apples but now you can only buy one.

This means the value of money has decreased and you can now buy fewer goods with the same amount of money.

And that’s the kind of inflation the U.S. is struggling with after increasing the money supply during Covid-19.

It is also not surprising to learn that the rest of the world is equally facing the same inflation hike as well.


Although Monetary Authority Singapore (MAS) has been strengthening Singapore’s currency, given how volatile the currency market is, it is hard to predict if our currency may depreciate in the near future.


To add on, with all the money flowing in the market, many high-net-worth individuals are attracted to Singapore. We have seen this in the unprecedented number of family offices set up locally. For reference, 400 family offices have been established in Singapore as of 2020.


Furthermore, with Hong Kong’s rapid isolation from the rest of the world, business executives, investors, and expatriates recognize Singapore’s increasingly unique position as the Global-Asia Pacific gateway and the financial hub in Asia. With their eyes set on Singapore, these investors bring along funds and investments to the local market.


With all these demand and money in the market, we are seeing an unprecedented rise in Singapore property prices despite the recent interest hike.


Now that we have expounded on the three main variables happening in the present economy, you can see how cost-push inflation, the low supply of housing in Singapore, and the oversupply of money in the market are all intertwined at present.


With this combination of factors, we would be hard-pressed to believe that the property price will drop any time soon.


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