Singapore's luxury home market – bucking the trend?

The gloom in the property market is all-pervasive. Residential, commercial, and industrial real estate prices are in a seemingly never-ending downward spiral.

Consider the data on property values. In response to the government's cooling measures, residential prices fell 4% in 2014 and then decreased by a further 3.7% in the following year. Values in Q1 2016 slipped an additional 0.7%.

Commercial property values were no better. The contraction in demand in this area was accompanied by large amounts of new office space becoming available.

Industrial property prices followed the same trend. In 2015, values decreased by 4.8% as the manufacturing sector bore the brunt of the slackening Chinese economy accompanied by a global slowdown.

Luxury homes – Despite the pessimism in every other sector of the real estate market, prices of prime residential properties have actually risen sharply in Q1 2016.

According to Christie's International Real Estate Report for 2016, the world's luxury real estate market has remained buoyant despite global economic volatility. In fact, the prices of high-end homes in some cities have moved up while the general economy is in decline.

Singapore has figured in Christie's Index rankings for the first time in its current report. In 2015, Singapore stood fifth, behind London, Hong Kong, New York, and Los Angeles. Interestingly, Sydney, Miami, San Francisco, Paris, and Toronto were lower down in the list.

The year 2015 also saw Singapore recording its highest ever price for a 'trophy home'. At US$67 million, the value surpassed the record achieved in most other cities across the world in the last year. Ridout Road Estate, which belonged to the family of the late property investor Chow Cho Poon, exchanged hands for S$85 million.

Knight Frank's report – International real estate consultancy Knight Frank has stated in its new Prime Global Cities Index that Singapore has recorded the eighth largest growth in luxury home prices.

Values in Q1 2016 have appreciated by 5.4% from a year earlier.

Explaining the rise in prices, Alice Tan, Research Head at Knight Frank Singapore, said, "The annual price increase signals 'green shoots of recovery' for the ultra-luxury segment, as high-net-worth individuals see rising value proposition for Singapore luxury homes after a prolonged two-year period of price declines."

Prices in CCR have risen – In another positive signal, prices in the Core Central Region (CCR) have risen by 0.3% in Q1 2016. While this increase is marginal, it is important to remember that values in all other segments – barring luxury homes – are moving in the opposite direction.

The CCR consists of Districts 1, 2, 9, 10, and 11 and stretches from the Central Business District to Orchard Road, Cairnhill, Tanglin, River Valley, Newton, and Bukit Timah.

Many residential buyers across the city aspire to live in this area, but few can afford the premium prices. Traditionally, the area has been in demand by investors. A turnaround in this sector augurs well for the property market.

Impact of interest rates – Since December 2015, the US Federal Reserve has made it clear that it will gradually increase its interest rates. But after an initial 0.25% rate hike at the end of last year, it postponed its plans.

Now, over six months later, a rate hike seems imminent. The Fed's Chair, Janet Yellen, recently announced that a rate hike in the coming months could be on the cards.

When the US interest rate increases, interest rates in Singapore will follow suit. Many residential property borrowers have their interest rates pegged to the Singapore Interbank Offer Rate (SIBOR). The SIBOR will rise as US rates increase.

This will hurt existing borrowers in Singapore as their instalments will get inflated. Prospective buyers of residential property may hesitate as they realise that the monthly amount that they need to set aside for their home loan has gone up.

These factors will probably dampen demand.

Is the price rise sustainable? – The surge in property prices in the luxury home segment is a remarkable development in a market that has been plagued by bad news for the last couple of years. The fact that buyers have an extraordinary level of confidence in the property market is amply demonstrated by their willingness to pay premium prices in addition to the additional buyer's stamp duty of 15% (for foreigners) or 5% (for permanent residents).

Many investors view Singapore as a stable market where the chance of a steep decline in property prices is unthinkable.

But it is a fact that the country's economy is dependent to a large extent on external factors. Unless there is an improvement in global conditions, the value of luxury properties will not regain a consistently upward trajectory.

The common wisdom is that as soon as commodity prices stabilise and China's economy resumes its earlier economic growth pattern, real estate values in Singapore will feel the positive effects. Till then, it is likely that even luxury home prices will witness a mixed trend.