Where does luxury property stand in times of inflation, hiking interest rates and looming recession?

Being in this industry for over a decade, this period is really a testing time for all of us. In this segment, I will shed light on the grounds of hiking inflation, interest rate and looming recession. I will also cover how these factors, including other internal factors, are affecting the luxury properties in Singapore, who are at stake and who are still eyeing this segment.

Luxury properties are high-ticket items, but how do you define them?

You can classify a house in the posh area of KLCC Pavilion as a luxury property. However, the sizes of properties vary. If you own a $20 million luxury villa in Kuala Lumpur’s outskirts, that too constitutes a luxury property. Similarly, owning a condominium unit in the Core Central Region (CCR) of Singapore is a luxury property.

As you can see, luxury properties can have many definitions. It does not have a cutout dictionary meaning as a usual word would have. It is the homonyms of the property industry – one word, many meanings!

So, let’s try and break down the definition of luxury houses!

  • Big ticket items with a high price range.
  • Houses that are located in prime posh areas.
  • Spacious large houses.
  • Properties with high-end amenities and facilities in a gated community.
  • Magnanimous properties like Good Class Bungalows (GCB) and villas.

However, to make a case for this topic, we would choose ‘Big ticket items with a price range of S$10 million or above’ as the definition of luxury properties. Usually, the target market of luxury properties is ultra-high net worths.

In times of escalating inflation or looming recession, money plays a key role in determining how a particular property segment is doing. Hence, they would evaluate a property’s purchasing, holding, or selling cost to make their decision.

What is inflation, and how is it impacting the Singapore economy?

Inflation, in definition, is too much money going for too little supply. Inflation can be of 3 types. When production capacity cannot meet the demand, there is a demand pull. The limited supply raises production costs, leading to cost-push inflation. Lastly, the price rise elevates labour costs to afford the increased cost of living, which is called built-in inflation. All of which exist in our present economy.

Money is a crucial topic in assessing Inflation, especially in luxury real estate.  First, construction cost has risen a lot as the demand for expensive raw materials, quality artistry, labour cost, and not forgetting land cost has risen to a new height. That is why price range is our scale measure for luxury definition.

In 2022, Singapore’s annual inflation rate increased to 6.7% in June compared to 5.6% stated in May. The inflation rate has over exceeded the market estimate of 6.2%. It has been the nation’s highest inflation rate since September 2008. The main upward pressure towards the hiking inflation is the increasing cost of food, clothing and housing.

The contributing factor to this escalating inflation rate is the global oil shock in the first quarter of 2022. Combined with the supply chain disruption and the ongoing effect of the pandemic, the government expects the annual inflation to remain between 4.5% and 5.5% at the end of the year.

Sure, this inflation number seems to be lower compared to the US, which hit 9.1% inflation in June 2022, a 40-year high for the country. Still, hiking inflation to such magnitude is always a cause of concern, and we are here to see how it is affecting the luxury properties in Singapore.

But before we jump into that, there is also the matter of recession.

What is a recession, and how close are we to it?

A recession is a temporary economic downturn when trade and industrial activities slow down. The unemployment rate hikes up, and the gross domestic product (GDP) drops for 2 consecutive quarters.

As per the latest report by the Bureau of Economic Analysis (BEA), the US economy shrunk an annualised 0.9% in quarter 2 of 2022, following a GDP drop of 1.6% in quarter 1 of 2022. So, technically, the USA has already entered a recession.

The federal reserve is also falling behind, so the USA has increased the target range for fed funds rate by 75bps, which sumps up to 2.25% to 2.50% in their July meeting. This is their 4th consecutive interest rate hike in 2022, pushing the borrowing cost to its highest level since 2019.

In the face of such looming anticipation of recession, Singapore is still floating fine! If we look at Singapore, its GDP grew at 4% y-o-y in the first quarter of 2022 and revised to 4.8% y-o-y in the second quarter of 2022. The government expects the GDP to be somewhere between 3% to 5% in the lower half of 2022 due to sluggish external growth. But as of now, the country is not yet in recession as its economy is still in the upward momentum.

Nonetheless, Singapore has tightened its monetary policy to battle against inflation and tread this critical time. As of 14 July 2022, the 3-month compounded Singapore Overnight Rate Average (SORA) rose from 0.3% in April to 1% in July.

Tyson Yuk is the founder of the blog Commercial Realty Singapore, Associate Group Director of Propnex Realty and Co-founder of the Luxury Team in PropNex.

His forte is in the commercial and luxury line of property, managing over USD$150 million in property portfolios on behalf of my high-net-worth and offshore investors for over two decades.

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