SINGAPORE (Sept 28): Singapore’s housing market remains fairly valued even after inflation-adjusted prices have risen 9% over the past year, following six years of correction.

According to a recent report by UBS, housing prices in the city state are currently 5% below their 2011 peak, with its price-income ratio still shy of the long-term average.

UBS’s observations come after Singapore’s surprise regulatory policy tightening announced in July, which the bank expects to dampen investor appetite. Going forward, it is anticipating speculative buying to decline and price growth to decelerate by end-2018, with rising interest rates to limit the upside as well.

In its report titled UBS Global Real Estate Bubble Index 2018, UBS notes that private market housing remains “barely affordable” in Singapore despite it being one of the few cities in the study whose affordability has improved over the past decade.

The price-to-income (PI) ratio for a 650 sq ft flat in the city state is estimated to be the equivalent of around 12, which suggests that house prices have decoupled from local incomes. This is in line with cities such as London, New York and Tokyo, where PI multiples exceed 10.

“Unaffordable housing is often a sign of strong investment demand from abroad, tight zoning and rental market regulations. If investment demand weakens, the risk of a price correction will increase and the long-term appreciation prospects will shrink,” notes UBS.

Singapore has also ranked third among all cities analysed by UBS for price-to-rent (PR) ratios, exceeded only by Paris and Zurich at second and first place, respectively, and coming ahead of Munich.  

According to UBS, extremely high PR multiples such as that of Singapore indicate an undue dependence of housing prices on low interest rates.

“Overall, half of the covered cities have price-to-rent multiples above 30. House prices in all these cities [including Singapore] are vulnerable to a sharp cor­rection should interest rates rise,” says the bank.

Overall house prices in Singapore, however, have stayed pretty much the same since 2012.

In contrast, UBS says its index points to “bubble-risk territory” in Hong Hong, where house prices have continued to increase by an annual rate of almost 10% since 2012 – with regulatory measures proving ineffective in restraining “insatiable investor demand” and speculative price expectations.

Nonetheless, the bank says Singapore’s long-term supply is well-stocked even as vacancy rates have declined until the middle of the year.

“Additional buyer stamp duties (ABSD) have been targeted specifically at developers to limit land price speculation. Purchasers of investment properties have also been slapped with higher ABSD. So we expect speculative buying to decline and price growth to decelerate by the end of the year. Rising interest rates limit the upside as well. Overall, the consequent stalling of any price rebound by the government prevents the emer­gence of speculative tendencies in the real estate market,” it notes.