luxury properties

Where does luxury property stand in times of inflation, hiking interest rates and looming recession?

Being in this industry for over a decade, this period is really a testing time for all of us. In this article, I have shed light on the grounds of hiking inflation, interest rate and looming recession. I have also covered how these factors, including other internal factors, are affecting the luxury properties in Singapore and Malaysia, who are at stake and who are still eyeing this segment.

The article has been originally published in Business Today in 2 Parts:

Published on 15 August 2022:

PART 1: Where does luxury property stand in times of inflation, hiking interest rates and looming recession?

Published on 18 August 2022:

How Luxury Properties Perform Amid Today’s Trying Economic Times: A Singapore-Malaysia Perspective

Content

Luxury properties are high-ticket items, but how do you define them?

You can classify a house in the posh area of KLCC Pavilion as a luxury property. However, the sizes of properties vary. If you own a $20 million luxury villa in Kuala Lumpur’s outskirts, that too constitutes a luxury property. Similarly, owning a condominium unit in the Core Central Region (CCR) of Singapore is a luxury property.

As you can see, luxury properties can have many definitions. It does not have a cutout dictionary meaning as a usual word would have. It is the homonyms of the property industry – one word, many meanings!

So, let’s try and break down the definition of luxury houses!

  • Big ticket items with a high price range.
  • Houses that are located in prime posh areas.
  • Spacious large houses.
  • Properties with high-end amenities and facilities in a gated community.
  • Magnanimous properties like Good Class Bungalows (GCB) and villas.

However, to make a case for this topic, we would choose ‘Big ticket items with a price range of S$10 million or above’ as the definition of luxury properties. Usually, the target market of luxury properties is ultra-high net worths. 

In times of escalating inflation or looming recession, money plays a key role in determining how a particular property segment is doing. Hence, they would evaluate a property’s purchasing, holding, or selling cost to make their decision.

What is inflation, and how is it impacting the Singapore economy?

Inflation, in definition, is too much money going for too little supply. Inflation can be of 3 types. When production capacity cannot meet the demand, there is a demand pull. The limited supply raises production costs, leading to cost-push inflation. Lastly, the price rise elevates labour costs to afford the increased cost of living, which is called built-in inflation. All of which exist in our present economy.

Money is a crucial topic in assessing Inflation, especially in luxury real estate.  First, construction cost has risen a lot as the demand for expensive raw materials, quality artistry, labour cost, and not forgetting land cost has risen to a new height. That is why price range is our scale measure for luxury definition.

In 2022, Singapore’s annual inflation rate increased to 6.7% in June compared to 5.6% stated in May. The inflation rate has over exceeded the market estimate of 6.2%. It has been the nation’s highest inflation rate since September 2008. The main upward pressure towards the hiking inflation is the increasing cost of food, clothing and housing.

The contributing factor to this escalating inflation rate is the global oil shock in the first quarter of 2022. Combined with the supply chain disruption and the ongoing effect of the pandemic, the government expects the annual inflation to remain between 4.5% and 5.5% at the end of the year. 

Sure, this inflation number seems to be lower compared to the US, which hit 9.1% inflation in June 2022, a 40-year high for the country. Still, hiking inflation to such magnitude is always a cause of concern, and we are here to see how it is affecting the luxury properties in Singapore.

But before we jump into that, there is also the matter of recession.

What is a recession, and how close are we to it?

A recession is a temporary economic downturn when trade and industrial activities slow down. The unemployment rate hikes up, and the gross domestic product (GDP) drops for 2 consecutive quarters.

As per the latest report by the Bureau of Economic Analysis (BEA), the US economy shrunk an annualised 0.9% in quarter 2 of 2022, following a GDP drop of 1.6% in quarter 1 of 2022. So, technically, the USA has already entered a recession.

The federal reserve is also falling behind, so the USA has increased the target range for fed funds rate by 75bps, which sumps up to 2.25% to 2.50% in their July meeting. This is their 4th consecutive interest rate hike in 2022, pushing the borrowing cost to its highest level since 2019.

In the face of such looming anticipation of recession, Singapore is still floating fine! If we look at Singapore, its GDP grew at 4% y-o-y in the first quarter of 2022 and revised to 4.8% y-o-y in the second quarter of 2022. The government expects the GDP to be somewhere between 3% to 5% in the lower half of 2022 due to sluggish external growth. But as of now, the country is not yet in recession as its economy is still in the upward momentum.

Nonetheless, Singapore has tightened its monetary policy to battle against inflation and tread this critical time. As of 14 July 2022, the 3-month compounded Singapore Overnight Rate Average (SORA) rose from 0.3% in April to 1% in July.

How are luxury properties performing amid the inflation hike, interest rate hike and the looming recession?

A lot has happened in 2022 that affected the property segment. Externally, the oil shock in early 2022 escalated inflation to a decade high. Interest rates flared up to lower the blow of inflation. On the other hand, USA’s recession scenario is threatening a looming recession in Singapore and Malaysia, though we are not there yet!

Singapore

Internally, in December 2022, the Singapore government imposed cooling measures that affected the luxury segment significantly. In addition, in February 2022, the Singapore government released the Budget 2022, announcing a substantial tax hike in upcoming years. This, too, has a drastic implication for luxury property buyers. But before we go into that, let’s look at how luxury properties performed despite these foreboding factors.

Transactions: Overall Singapore property vs luxury property

MonthOverall propertiesLuxury properties
Dec 2021-29.23%-17.86%
Jan 2022-43.72%-17.86%
Feb 2022-52.51%-53.57%
Mar 2022-35.66%-25.00%
Apr 2022-30.44%-39.29%
May 2022-14.65%-35.71%
Jun 2022-43.17%-32.14%
Jul 2022-52.06%-35.17%
Credit: Tyson Yuk

Note: The month of November 2022 outperforms the rest of the month for quarter 4. Therefore, we assumed November figures as a base to represent the heated market before the cooling measure is implemented in the month of December 2022.

The chart represents Luxury Property performance compared to overall properties in Singapore

luxury properties
Image credit: Tyson Yuk

You can observe from the table and chart above that I have drawn a comparison of how the luxury segment in Singapore performed compared to the overall property industry. For the reasons stated above, the overall property industry’s transaction volume dropped since November 2021. 

The first pullback in transactions was due to the latest cooling measures introduced by the Singapore government in December 2021. Property investors would more keenly feel the impact. Singaporean property buyers now face higher Additional Buyers Stamp Duty (ABSD) of 17% and 25% for their second and third property purchases, respectively, compared to 12% and 15%.

For PRs, they now have to pay 25% and 30% ABSD for their second and third private residential purchase from 15% previously. 

In addition, the Total Debt Servicing Ratio (TDSR) for home loans was tightened from 60% to 55%. As a result, home buyers need to pay more upfront deposits to buy houses now.

Hence, overall property transactions dropped significantly in December 2021 and January 2021. However, compared to that, the luxury property transaction dropped relatively less to 17.86%.

However, the biggest shock for luxury property holders came when Singapore Budget 2022 announced its latest taxation.

The taxation rate for the luxury segment is set to almost double by 2024. 

Taxation is based on the annual value of a property (AV). AV comprises the annual market rental value of a property deducting general maintenance cost and furniture rental cost (if any). 

The taxation rate as of 2022 was up to 16% of the AV of a property generating more than  $130,00 AV per year. However, the Budget 2022 states that AV that exceeds $100,000 would now be subject to tax up to 32% by 2024 for both owner-occupied and non-occupied residential properties.

For the luxury segment, with property prices above S$10 million, this change in taxes is a substantial addition to holding their property. As such, the transaction drop for luxury properties matched the overall property industry in February 2022.

However, with time, the luxury property segments started recovering. Though the transaction is still low for overall properties in July, the luxury segment has outperformed the other segments. 

Malaysia

While Singapore’s luxury segment outperformed the other property types, in Malaysia, it is not the primary go-to choice for ultra-high net worths in 2022.

In the previous year, luxury properties were seeing declining prices. As per reports, this segment has carried the challenges faced in 2021 into this year. In addition, there are also no fiscal goodies announced in Budget 2022 to encourage the luxury segment buyers. The oil shock, inflation hike, and the pandemic has not helped the sentiment. 

But now, the Malaysian economy is showing a positive outlook with growing investment projects and the reopening of international borders. Hence, this downward price of luxury properties is expected to flatten out in 2022, with the prospect of upward growth in 2023. 

Besides, in Budget 2022, Malaysia removed the Real Property Gains Tax (RPGT) if you sell your property from the sixth year of purchase.

RPGT is Malaysia’s version of cooling measures to curb speculation and balance the overheated property market. This exemption is a bonus for investors and second home buyers who do not intend to retain properties for a longer term.

What are the odds against luxury properties in Singapore?

For someone buying a S$1 million property, the ABSD is only S$30,000. But for a luxury property buyer purchasing a S$10 million property, the ABSD is approximate S$3 million. This is if we are talking about the purchasing cost.

Now, consider the holding cost. Assuming a rental yield of 2-3% per year, AVs of houses S$10 million are approximately S$200,000. In 2022, this group of people will have to pay taxes amounting to around S$34,000. However, in 2024, for the same AV, their tax will almost double to S$61,200. (regardless of the property being vacant or rented out.)

Why are luxury properties still outperforming the other segments in Singapore?

In short, yes, the luxury segment is outperforming compared to the overall property industry in Singapore despite the surmounting odds playing against them. 

We suspect amid the global inflation and looming recession, investors are looking for a stable place to park their wealth. They like to invest in a less volatile area to secure their wealth from the escalating inflation, and Singapore makes a good spot for that.

As earlier stated, Singapore’s GDP is still growing at this critical time. The country is stable in terms of politics and economy. Besides, foreigners like to hold assets with a strong underlying currency to hash out inflation. Its currency is also holding strong against all buckets of currency.

Hence many foreign ultra high net worth is buying luxury properties in Singapore to secure their wealth in a safe place. In fact, Malaysia ranks number 2 in the list of top foreign ultra-high net worth buyers in Singapore. 

Is it time to sell or invest?

There is no best or worst time to buy or sell a property. The fundamentals for both the Malaysian and Singapore industry is similar. There’s no timing in the market. Your appetite and financial grit will decide if you should invest or sell not.

You might think to hold off your money in these economic uncertainties and financial difficulties, and that’s your choice. But in a homebuyer’s market, there are always pockets of opportunity amid economic or global volatility.

However, if we look at luxury property holders in Singapore, they are not keen to sell. The main reason is that if they sell their property now, their buyback cost will be 30% due to ABSD. This applies to both foreign buyers and Singaporeans holding multiple properties.

For Malaysia, as the market is slowly recovering, the declining prices will flatten out, as mentioned above, which will close that little window of opportunity. You can take advantage of the low luxury property prices to invest now. 

Besides, one perk of hiking inflation is that the rental is also increasing, whether in Singapore or Malaysia. As such, luxury property owners can generate an increased rental which can help them compensate for the increased cost due to tax/inflation.

Luxury market prices are holding firm. Buyers’ interest is still strong. They offer a less volatile asset with the potential of good returned earnings in terms of rental. So, people are keener to invest in the luxury segment than selling them. 

Particularly for Singapore, due to the strong SGD as an underlying currency holding on the property and high-end properties having limited supply, offshore ultra-high net worth feels that it is one of the best assets to hedge against inflation and market uncertainty.

Key points to consider when buying high-end properties. 

  • Interest rate is heading north, do not overleverage. Cash flow management is critical.
  • One should look at a long-term horizon above five years when investing in high-end properties.
  • Importantly, do not overpay for the property; a reputable and trusted adviser from conducting detailed due diligence before purchasing prevents one from overpaying.  

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