Singapore has the highest standard of living of any country in Asia - higher even than the US. There are two reasons for this:
It’s a large city that’s very strategically located.
It has high value-added jobs from a heavy concentration of finance and trade, rather than mere manufacturing.
That’s why it’s called the Monte Carlo of Asia. The problem is, because it’s 100% urban and has limited land, it has some of the most expensive real estate in the world.
Why is that a problem?
Well, take a look at this chart:
You can see how real estate prices in Singapore have risen 68% since early 2009…and 110% since the 1999 low after the Southeast Asian financial crisis. Once the country’s government began actively attracting foreign professionals and investors, the value of prime properties rose 80% from 2004 to 2013, increasing on top of already high global prices.
Today, the price of central-city real estate is $18,406 per square meter, versus $10,381 in New York. The average home price adjusted for purchasing power parity is $10,382 per square meter versus $6,728 in London and $6,111 in Paris. That’s extreme, when you consider that residents of Singapore pay 78% more than New Yorkers, while they make 25% less on average.
That’s clearly a bubble…and as I constantly reiterate: Bubbles ALWAYS burst.
In the beginning, they burst from their own extremes. In the US, the subprime crisis triggered the fall, but when you look at China today, cracks are appearing due to massive overbuilding and vacancies.
Singapore's Own Trigger
Like Hong Kong, it is a city in a wealthy and developed country. It features high level middle-class households - and not just marginal ones. Recently, there’s been a public backlash against foreign buyers who are bidding up real estate and making it unattainable for the everyday, $60,000-a-year household.
This happened in Hong Kong and also in San Francisco, but in different ways. In San Francisco, the locals particularly hate large tech companies like Google, Inc. (GOOG) , which are forcing them out of their neighborhoods in the Bay Area.
In Singapore, however, the government decided to react to the public sentiment. After all, it’s a democracy.Those in charge instituted a succession of strong measures to curb foreign buying, and speculation in general.
The first was an up-front property sales tax of 18% for foreign buyers…ouch!
The second was additional taxes on properties that were flipped: 16% within one year, and 12% within two years.
So, foreign buyers flipping real estate in Singapore are now being taxed 18% on the front-end and as much as 16% on the back-end…for a total slap in the face of 34%!
The third step Singapore’s government took was to cap the amount of debt a borrower is allowed to take on compared to their income.
How effective were these measures? In 2014, new property sales were half of those registered in 2013. So unsurprisingly, residential prices fell 4% in 2014. Double-digit declines are forecast for 2015, and I see even more substantial declines as very likely.
Tough Times in Paradise
At the W Residences, one of the newest high-end developments in the country, fewer than half of the units have been sold. Most of the expatriate professionals living there now rent instead of owning a property.
Even worse hit has been Sentosa Cove that attracts ultra-wealthy Chinese, Malaysians and Indonesians. There, you have extravagant homes, including one designed like an Egyptian tomb. But now, few people are buying, and the ones that do choose to enter the market are largely leasing.
Sentosa had become the poster child for the extreme rising inequality in the country. Now it is suffering from the natural revolt that inevitably follows, especially in more affluent middle and upper-middle-class societies where the people have more power.
In short, serious fissures are now showing in Singapore’s real estate market. Recently, an apartment that was bought in 2007 for seven million Singapore dollars was sold for four million Singapore dollars. That’s a painful 43% loss. And it’s only the beginning, as this domino begins to tumble.
There is also a massive load of commercial properties set to be completed in 2016, just in time for the global bust to manifest in full force. Commercial properties should be an absolute blood bath, especially as the China bubble continues to burst.
For years, my view has been that the real estate bubble globally (and nationally) is much more varied due to different supply and demand pressures around the world. The best cities are almost all in bubbles. Japan first, and then the US, then Ireland and then Spain have all led the popcorn popper of bursts around the world. Now, China and Singapore are starting to pop.
Singapore, in particular, is a disaster waiting to happen.
I see all major bubbles bursting in the next several years. The more cities that crack, the more it breaks this grand illusion that real estate never goes down, especially in the best places and on the high-end.
History shows that when the greatest bubbles burst, it is the best and priciest cities and developments that really go bust.