Resale prices: The cost of a single-digit drop

At a press conference in December last year, Minister for National Development Khaw Boon Wan told reporters that a single-digit fall in public housing resale prices this year would be manageable and “a very good development”.

“A soft single digit is something the human mind, and employers, employees, the environment and the economy can adjust to,” he said then.

But what would be the monetary impact of a single-digit fall in housing resale prices?

A common way to answer this question is to calculate the change in measurable market value if prices were to decline by no more than a single digit, meaning 9 per cent.

According to SRX Property, the cooling measures have already resulted in an estimated loss (see table) in Housing and Development Board resale market value of about S$6 billion since the peak of the SRX Property Index for HDB Resale in April 2013.

A single-digit drop of 9 per cent this year would result in an additional loss of more than S$5 billion.

In the private, non-landed market, the decline in market value has been more dramatic because it is more possible to measure its market value.

Since the height of the SRX Property Index for Non-Landed Property in January last year, the measurable value of the private market has declined by more than S$15 billion.

A single-digit drop of 9 per cent in private flat prices this year would see an additional loss of more than S$34 billion.

This means the cooling measures have shrunk the resale market value for HDB and private flats by a measurable S$21 billion.

An additional fall of 9 per cent in both markets would result in another S$39 billion in losses, for a total measurable loss of S$60 billion since their respective peaks.

Some might argue that the decline in market value is a correction, while others would label it a loss.

It depends on your perspective.

Those who see it as a correction would argue that today’s total measurable loss of S$21 billion is not a real number because the market should not have been that high in the first place.

People in this camp often tell me that they welcome the decline in prices because then they can upgrade at lower prices, by which they more likely mean fairer prices.

The problem with this perspective is that it comes at the expense of people who have seen their homes devalued.

Financial loss comes in several forms. There is the actual loss, but there is also the perceived loss. For example, a person who sells a home during the cooling measures could make a profit, but he or she can emotionally (and rationally) conclude that more profit should have been made. This is perceived loss.

Perceived loss comes in other forms and can have significant economic ramifications.

For example, when the value of one’s home declines, one feels less wealthy. When one feels less wealthy, the rational response is to cut discretionary spending. When enough households cut discretionary spending, retail suffers and, thus, the economy and jobs suffer.

It is this perceived loss that Mr Khaw alluded to when he said that a soft single-digit decline is something people and the economy would be able to adjust to.

In other words, the challenge for leaders is to determine when a prescribed policy has run its course and, if left in place, could result in more harm than good to the often fragile psyche of the economy and its people.

Today, a measurable decline of S$21 billion in home value represents 5.4 per cent of SingStat’s estimated nominal gross domestic product of about S$390 billion last year.

If prices this year decline by 9 per cent — this figure being the extreme end of a single-digit drop — this would result in S$60 billion in measurable losses and represent 15.4 per cent of Singapore’s estimated nominal GDP last year.

At what point, then, will the human mind be unable to adjust to the decline in the measurable value of the property market?

About the author:

Sam Baker is co-founder of SRX, an information exchange formed by leading real estate agencies in Singapore to disseminate market pricing information and facilitate property listings and transactions. For more details on the data and calculations used in this article, visit SRX.com.sg/research.