One common question that is posed to me is what investors should look out for to tell if the market is starting to weaken. To answer that question, my research team did an analysis sometime back to compare the correlation between the median condominium and apartment prices and the following factors:
1. Foreign Direct Investment (FDI).
2. Number of foreigners in Singapore.
3. Number of Singapore residents.
4. Number of marriages in Singapore.
5. 3-Months SIBOR (Singapore Interbank Offer Rate).
This post would only be elaborating on 3 of the 5 factors mentioned.
Correlation is broadly defined as a statistical measure of how two factors behave in relation to each other and it ranges from +1 to -1. A perfect positive correlation (correlation co-efficient of +1) implies that as one factor (i.e. FDI) moves either up or down, the other factor (i.e. private property prices) will follow in the same direction. If the correlation coefficient is 0, the movement of the factors are said to have no correlation and movements are completely random with respect to each other. Statistically, factors that have a correlation index of more than 0.5 can be deemed to be highly correlated.
The effects of foreign investments
FDI in Singapore measures the amount of investment by foreign investors in their Singapore affiliated companies where they own at least 10 per cent of paid up capital. It is important to note that FDI does not represent the amount of money that goes into the real estate market. However, an increase in FDI could lead to complementary business and real estate activities that in turn would have an impact on the real estate market (i.e. the opening of a local office that could lead to an increase in the number of foreigner staffs who need to rent). Nonetheless, in the absence of other more relevant data, FDI is mainly used as a proxy to give us an idea of the amount of foreign investments that is coming into Singapore over the years.
Figure 1 shows how the FDI as well as median property prices changed from 1999 to 2008. By comparing FDI against median $psf for apartments and condominiums, we found that the correlation coefficient was 0.87 and 0.91 respectively.
Figure 1: Correlation between FDI and median $psf for apartments/ condominiums from 1999 to 2008
Source: Department of Statistics, URA and Ascendant Assets Pte Ltd
The effects of domestic demand
To analyse the impact of domestic demand on the private residential market, the number of marriages was used as a proxy for this analysis. Based on convention, most Singaporeans would start looking for properties when they settle down and get married. Even if many do not buy a private property as their first home, the impact of domestic demand could spill over to the private residential market if they were to buy a flat from the resale market, and the owner, who sold his flat to the newly married couple, in turn upgrades and buys a private property. If this happens often enough, we should be able to see some trends between the number of new marriages and private property prices. However, from Figure 2, we can see that there is hardly any discernible trend.
Figure 2: Number of marriages and median $psf of apartments/ condominiums from 1990 to 2009Source: Department of Statistics, URA and Ascendant Assets Pte Ltd
Not surprisingly, the correlation between the number of marriages and median $psf for apartments and condominiums is 0.07 and 0.36 respectively.
What about interest rates?
Many people believe that low interest rates are the cause of the current high demand for properties. If that relationship were true, we would expect high inverse correlation (of between -0.5 and -1). An inverse correlation occurs because property prices should drop as interest rates goes up; conversely property prices should increase as interest rates drop. However from Figure 3, we can see that there does not appear to be a discernible trend. In addition, the correlation between the 3-month SIBOR and median $psf for apartments and condominium is just -0.35 and -0.31.
Figure 3: 3-month SIBOR (%) and median $psf of apartments/ condominiums from 1988 to 2009 Source: Department of Statistics, URA and Ascendant Assets Pte Ltd
From this, we can tell that there is a weak correlation and infer that interest rates (that fluctuate within an acceptable range) would unlikely be a showstopper for someone who is thinking of buying a property. If you think about your own property buying experience, how much significance do you place on interest rates such that it affects your buying decision? As long as interest rates do not go excessively high, I would reckon that things such as affordability and location would probably matter more.
Rounding it up
To conclude, what would I look at to tell if a property market correction is coming? One of the key things I would look at is foreign direct investment, while I would probably not focus too much on things like number of marriages and SIBOR rates. In other words, the mass exodus of foreign investment and/or foreign interest would likely bring about a drop in property prices. Of course, there are many other factors that should be considered and what I have covered is just the tip of the iceberg. Unfortunately, an in-depth discussion is beyond the scope of this blog. Nonetheless, I hope that through this article, you will realize that there is a lot more to the property market than what you might think. And hopefully this will kick start your journey in property investing.
About Getty Goh
Getty is the Director of Ascendant Assets, a real estate research and investment consultancy firm. For more property market insights and articles, visit Property Central.
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