5 things we already know in 2023

As we step into 2023, we are greeted with higher prices, taxes and interest rates. What’s more, we have no idea since when good news has become bad news.

The government gave every Singapore household $300 CDC vouchers because we have to pay 8 percent GST now. Healthy GDP growth means inflation is going to stay high. Even US stock prices drop on positive employment, consumer spending and manufacturing data – just because the good numbers provide a valid reason for Federal Reserve to continue rate hike.

2022 is a year that many investors would rather forget.

“Since the start of the year, every now and then the financial market would give us some surprises or heart attacks: First was the China developer bond market catching fire. Next, the tech stocks tanked. Huge wealth evaporated from the US equity market. Then came the collapse of the cryptocurrency prices. Under high inflation and recession fear, many foreign currencies weakened significantly … Prices of once high-flying assets can plunge like nobody’s business. Worse still, they show us that they are always capable of dropping to a new low.”

– “Cash is king now”, Propertysoul.com

What’s over is over. We are not going to waste time doing another 2022 review or recounting lessons we learned last year. Let’s jump straight into what we already know will happen in 2023.

1. High mortgage rates is the new normal.

“If you want to make people feel less wealthy, go after their largest financial asset. For the vast majority of people in the U.S., their home is their largest financial asset. It is no surprise that the Fed crushed housing. That’s just textbook 101 how to bring down inflation.”

– John Rotonti, Motley Fool senior analyst

Federal Reserve wanted to suppress inflation. But it crushed the housing market instead. Mortgage rates climbed to the highest in decades. Property sales dropped to historic lows. Home prices are falling too.

Susan Wachter, Wharton professor of real estate and finance, said it best.

“The Fed is using the housing market as a fulcrum to slow overall activity and get the inflation rate down. When they succeed in doing that, housing and rents are likely to come down most and fastest, and that may get us out of the inflation bubble sooner than we think in 2023. Until that happens, the housing market for sure is doomed; it’s a sinking ship … It is the housing sector that is in recession and is pulling down the rest of the economy.”

The Fed is expected to be less aggressive on raising rates in its coming meetings. Note that slowing down doesn’t mean leveling or declining. Rates will still be going up, albeit a more gradual one. We have no choice but to accept high mortgage rates as the new normal.

When we talk about interest rate in 2023, it is not how often and how high banks will raise mortgage rates, but how long high rates will stay. As they say, don’t fight the Fed. Because you can’t beat it.

2. Sales volumes will continue to hit new lows.

The URA data (January 13) shows a miserable set of data on non-landed private home transactions in the 4th quarter. Developers only sold 681 new units in the last three months – a 77.4 percent year-on-year dive from the last quarter of 2021. For resale units, last quarter transacted 2,194 units which is a year-on-year drop of 53.8 percent.

For the whole year of 2022, developers sold a total of 7,090 new units. This is a far cry from 10,000 to 13,000 units estimates by the property agencies. The new private home market has transacted 45.6 percent less than 13,027 new units sold the previous year. Similarly, the total number of resale units sold last year is 13,526. Again this is 32 percent less than 19,962 resale units in 2021. (Note: There may still be upload of latest transactions in the URA database. But the difference is negligible as people were going for vacations rather than buying homes at the end of the year.)

With the absence of cheap money, the once heated private home market quickly cooled down. 2022 is a year of rising mortgage rates and falling affordability that will carry into 2023. The private property market will remain subdue this year.

3. Global home prices will continue their fall.

This is what we usually see across any property market: Volumes plunge first, followed by prices.

Crash correction? Some countries are seeing a slowdown in market activities while others are experiencing a record-breaking price crash.

Sweden’s real estate market is now known as the world’s coldest winter. As of last November, the country’s housing market has crashed with home prices slumped 15 percent. The market is anticipating a new low of 20 percent price slump. Bloomberg described Sweden’s free-falling property market as the worst economic slump in the EU.

Canada home values have plummeted 19 percent and are expected to fall 30 percent this year. Australia and New Zealand home prices have declined 8.4 percent and 5 percent respectively from their peak.

Hong Kong home values have dropped 13.8 percent. Prices have gone back to the level of 5½ years ago in July 2017. Analysts expect prices to drop another 10 to 25 percent in 2023. A couple said they were so happy for missing the opportunity to buy last September. Value of their dream home has fallen at least 10 percent. They consider the hundred thousand dollars saved a windfall. They are now in no hurry to buy a new home.

Stepping into 2023, we have more bad news than good news. If interest rates stay high and the property market has no sign of looking up, the best strategy for prospective homebuyers is to bide their time.

The problem is: Most people only own one home and can only afford to buy one. They want to buy when everybody is buying, when prices are high and when it’s not the right time to buy. But when prices are low and it’s a buyer’s market, they don’t have the need, money and incentive to buy anymore.

4. Low affordability will eat further into the property market.

Singapore floating mortgage rate has shot up from 1.3 percent at the beginning of 2022 to above 4 percent end of the year. For every $1 million mortgage, homebuyers now have to pay $5,300 for monthly instalment. For every $1.5 million housing loan, borrowers need to set aside almost $8,000 every month.

This is the main reason behind the rapid decline in home sales volume. Potential homebuyers continue to be priced out of the market. Who said Singaporeans are cash rich? They are more price sensitive than we think.

Mortgage rates climb every few months. But home prices haven’t dropped at the same speed. Homebuyers are left with three options: 1) Buy now with higher cash outlay and accept higher interest; 2) settle for a cheaper home; or 3) hold back their home purchase.

In every society, the wealthy is the minority. We can’t depend on them to create enough demand and to drive continued economic growth. The solution is to encourage the majority to take up loans – with low interest, by installments and deferred payment.

Many homebuyers define “affordability” as their ability to settle minimum downpayment and minimum monthly instalment after borrowing maximum loan-to-value. Their definition of affordability is valid only when interest rates are low.

Unfortunately, it is naive to believe that interest rate can’t rise beyond a certain point. Because this is entirely under the control of the lenders, not the borrowers. Buyers can take a leap of faith, but they can’t sail against the wind.

From 1.3 percent to over 4 percent, for every $1 million housing loan homeowners are paying $1,372 more to the bank every month. The annual increment is $16,464. No wonder last November OCBC said 40 percent of Singaporeans are already struggling to pay their home loan.

5. Demand will shrink under company cost/staff reduction

For two years, many companies maintained sustainable growth or strove for bigger market share by snapping up new fundings and cheap loans. Under the current high interest rates, companies are facing immerse pressure to pay back the banks. Besides using new borrowings to cover old ones, the obvious solution is to cut costs and manpower.

A week ago, Savills claimed that “Singapore real estate market to remain bright spot:” and “the office sector continues to see rising rents for CBD offices”. Singapore immediately became Elon Musk’s cost-cutting target. On Wednesday, Twitter Singapore staff were chased out of their CapitaGreen office by 5 pm on the same day of the “WFH from now on” email announcement.

For some, last Christmas’ jingle bells somehow became layoff alarm bells. Sacking started in the banking industry, including Credit Suisse, Morgan Stanley, Barclays, JPMorgan and Citigroup. Then downsizing slowly spread to startups, ecommerce and tech companies.

Twitter has fired 3,800 staff (about 50 percent of its workforce) and just started laying off another 4,400 contract workers. Microsoft fired hundreds of its employees while Cisco laid off 4,100 globally. Amazon is sacking 18,000 workers. Meta (facebook) will get rid of 11,000. Google is letting go of 10,000 staff. SEA (mother company of Shopee) is cutting 7,000 employees. Carousell is firing 10 percent of its workforce. Hewlett-Packard plans to cut 4,000 to 6,000 positions. Salesforce will sack 7,300 staff. The latest in January 2023: Goldman Sachs plans to cut up to 5,200 jobs while BlackRock is letting go of 500 employees.

US unemployment rate fell to 3.5 percent in December. This is misleading because in every December unemployment data is masked with seasonal adjustment. It can’t hide the fact that the country is under an imminent threat of recession.

We don’t know when layoffs will end. Until then, upgrading or buying a new home will be last on salaried workers’ mind.

Food for thought

The good news is rate hikes will be less aggressive from now on. The bad news is high interest rates will stay for some time. The same is true for inflation. However, the biggest challenge in 2023 is not high interest rates, but a global economic slowdown or recession.

This year private home supply will far exceed demand. Look out for the 20,098 new private homes completing this year. Besides, there are still over 45 new private residential projects that developers have been holding back to launch.

Many unexpected events happened in 2022. More surprises are awaiting us in 2023. Hold your horses and wait for the dust to settle.

If you need advice on property matters or residential properties in Singapore, you can check out my personal consultation service.

My new book Behind The Scenes of The Property Market is now available for preview and order online. You can also check out my online courses.