How Effective is Singapore Real Estate as an Inflation Hedge?

Singapore property serves as a good hedge during high inflation and in the long term, but it is important to note that real estate prices are cyclical.

Although Singapore’s residential properties have the potential to be an inflation hedge in the long run—that is, at least a decade—investors should still keep in mind that it is possible for a short-term phenomenon of falling property prices to occur while inflation is soaring.

Furthermore, according to an analysis by the Institute of Real Estate and Urban Studies (IREUS) at the National University of Singapore, buying a home when market prices are at a new high may yield mixed results in terms of real returns.

The institute conducted a comprehensive examination of longitudinal data to study the performance of the residential sector relative to inflation. It compared the price indices of Housing & Development Board (HDB) resale flats and private housing against core inflation, which excludes accommodation and private transport costs.

For a long time, investors have regarded Singapore’s residential assets as a good tool to hedge against inflation. IREUS noted that given the scarcity of land, many buyers expect property prices to rise indefinitely in the long term, based on the premise that home values should outpace inflation.

Amid heightened external inflationary pressures from the Russia-Ukraine conflict and the regional Covid-19 pandemic, Singapore residential properties continue to attract investors.

According to the IREUS analysis, on a macro level, it appears that both the private residential and HDB resale markets serve as good hedges during periods of high inflation and in the long term.

However, it is important to note here that real estate prices are cyclical. When delving into the data, periods of upswings and downturns can be observed.

When inflation continues on an upward trend while the property market is in a slump, the situation may not be entirely optimistic.

For example, from the third quarter of 2013 to the second quarter of 2017, the Urban Redevelopment Authority’s (URA) private residential price index fell by 11.6%. In comparison, core inflation was 4.4% over the same period.

The slump in the HDB resale segment lasted from the second quarter of 2013 to the second quarter of 2019, with the price index falling by nearly 12.5%, while core inflation was close to 8%.

AnjiaSG’s local property agent, Leo Kwek, pointed out that the dynamics of the residential market are determined by many factors, including government policies, and property market prices can diverge from the core inflation rate.

“Therefore, we might see a situation where property prices fall while the inflation rate continues to rise independently. So, buyers need to have the holding power to wait for the market to recover,” he added.

Holding a property incurs recurring costs, such as taxes, as well as maintenance fees and vacancy costs for homes on the rental market.

Over the years, apart from global economic shocks, Singapore’s inflation rate has been largely stable. From 2012 to 2021, the annual core inflation rate averaged about 1.2%. During the same period, based on their respective price indices, the average annual return for private housing was approximately 1.7%, and for resale HDB flats, it was 1.4%.

2012

The highest core inflation rate recorded between 2012 and 2021 reached a new high of 2.5% in 2012. Strong labor demand drove business expansion, and stricter foreign labor policies led to wage increases, which in turn stimulated inflation.

In the same year, housing also became more expensive—and at a faster rate. In the fourth quarter of 2012, the private residential price index increased by 2.8% year-on-year, while the HDB resale price index climbed by 6.5%.

2007, 2008

A similar situation of rising inflation was also seen in late 2007 and 2008. Disruptions in the import of major food sources and higher oil costs led to inflation in 2007. On an annual basis, the core inflation rate reached 2.2% in 2007 and jumped to 5.7% in 2008.

Despite this, the Singapore residential market rose faster than inflation. In the fourth quarter of 2007, private home prices soared by 31.1% year-on-year, and resale HDB flat prices increased by 17.5%.

However, IREUS stated that due to the global financial crisis, the private residential price index fell by 4.7% year-on-year in the fourth quarter of 2008.

Buying at a Historical High

Buying a property at the peak of a cycle does not necessarily provide a good hedge against inflation, as it depends on market conditions.

Private residential prices last peaked in the third quarter of 2013, before the introduction of the Total Debt Servicing Ratio (TDSR) framework. IREUS stated that if those who bought in 2013 were to sell their private properties today—with market prices at an all-time high—the private residential price index suggests they could gain a cumulative return of 13%. This surpasses the core inflation rate of about 10.9% recorded over the same period.

However, owners who bought a resale HDB flat during a high point before the resale price index peaked in the second quarter of 2013 might not be better off selling today. If these buyers were to sell their resale flats in the first quarter of 2022, they would have gained a return of about 6.8% over this period. This does not exceed the core inflation rate of 11.6%, meaning the real return for these HDB owners would be negative.

On the other hand, an earlier cycle shows the opposite result. HDB owners who bought a resale flat at the peak in the fourth quarter of 1996 and then sold it in the second quarter of 2013 would likely have seen considerable returns after adjusting for inflation.

During that cycle, the cumulative return based on the HDB resale price index was 50.9%, which outstripped the core inflation rate of 29.3% over the same period.

In contrast, the private residential market did not perform as well. According to the URA price index, the cumulative return from the second quarter of 1996 to the third quarter of 2013 was 19.2%, lagging behind the core inflation rate of 31%.

However, in this scenario, the returns for private homeowners might be understated, as many private property owners could have sold their condo units en bloc, especially during a collective sale boom.

Leo Kwek noted that while housing price indices provide a guide to the ability of residential properties to hedge against inflation, they are still generational and cannot cover the full spectrum of property ownership, such as the depreciation of aging buildings and expiring land leases.

“Therefore, older residential properties with shorter remaining leases may not serve as good a hedge as newer or freehold properties, unless the buyer anticipates potential gains from a collective sale,” he said.

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