The relationship between the property market and the economy of a country is intricate and interconnected. The property market, particularly the real estate sector, plays a crucial role in the overall economic landscape of a country - especially for a small country like Singapore.
Real estate is a significant component of the economy, contributing to investment and construction activity. A thriving property market can stimulate economic growth through increased construction, job creation and many related industries contributing to overall economic well-being of a country. Conversely, a slowdown in real estate activities may result in job losses and sluggish economy. Government budgets can also be influenced by the health of the property market.
"If you are waiting for a recession to buy property because you believe that a recession will lead to a property market downturn, you may not be aware that the property market may help to predict a recession before it happens." say real estate professional Kiwi Lim from the largest private real estate firm - Huttons Asia.
The chart above from Huttons Research shows that the property market fell first before the economy contracts. Prices in the property market tend to fall ahead of the economic contractions or slightly before a crisis or recession.
The chart above also shows that the recovery in the property market is also instantaneous with the economic recovery and most of the time the recovery in the property market is sharp and swift catching most buyers off-guard if they are not watching closely.
It is also important to note that real estate markets are not isolated because they can be influenced by a combination of factors, e.g. global economic conditions, calamities or geopolitical developments like war that may unfold anywhere in the world especially in the Asia-Pacific region. Shifts in international investment patterns and economic stability may adversely impact the property market of a specific country - even for a prominent financial center like Singapore.
Property market as a leading indicator of the economy
The property market is often considered a leading indicator of the economy, meaning that changes in the real estate sector can precede and provide insights into broader economic trends. Here are some ways in which the property market can act as a leading indicator:
Consumer Confidence: Changes in property values impact household wealth. As property values increase, consumers may feel more financially secure and be more willing to spend. This can contribute to economic growth. Conversely, a decline in home values may have the opposite effect.
Investment and Construction Activity: A surge in real estate investment and construction can signal economic expansion. Increased construction activity generates jobs, income, and economic activity.
Credit Conditions: Central banks often use interest rates to manage the economy. Changes in lending standards, interest rates or the ease of obtaining a mortgage can impact the property market and the economy.
Kiwi Lim believe that with the current TDSR and the cooling measures that the government had imposed earlier, most homeowners will be able to hold onto their properties during a recession. The TDSR assumes that the buyer is still able to pay their monthly mortgage at 4% interest rate even if they suffer a 45% salary cut. Therefore, if home owners are able to hold their properties beyond the economic downturn into the recovery stage, buyers waiting for a fire sale during recession may be disappointed.