We received a comment earlier this week (posted in our “Risk Transfer” article), with questions regarding the rental situation in Singapore. Reader eremarf wrote:

“There’s one thing I’d like to learn more about – why do rental prices keep going up in Singapore? What are the mechanisms, why does it occur, and what are the fixes we can consider?”

We thought a short article to explore the questions he brought up would be an interesting exercise, so here we go!

Now, the basic driving forces behind market prices are supply and demand. Pretty straightforward economic theory, right? But we’d want to dig a little deeper to find out what drives said supply and demand. Let’s take a look, shall we?

Increasing foreigner presence – The almost explosive increase in foreign labour has directly affected the demand for rental housing. Their need for housing is immediate, direct and widespread. They require housing for themselves (and sometimes their families too, in the case of Permanent Residents) the moment they arrive and and stay here. Since they form a large segment of the rental target audience, their numbers affect the market directly and proportionately.

Room rental demand - With the greater numbers of foreigners, especially blue-collar foreign workers requiring housing, even the bottom-end of the rental market is experiencing upward pressure. Previously, rooms were the most affordable rental option, ceteris paribus. Single renters such as foreigners, overseas students, and even the odd Singaporean looking to cut the apron strings, were the main subscribers to this option. Even at this affordable end of the market, privacy was valued, and thus most would not agree to co-renting a room.

The recent influx of foreign labour however, has had the effect of placing even greater pressure on this market niche, to the point that many have had to consider sharing a room with another tenant. Going past this barrier has allowed room rental prices to creep up to new heights. With two tenants in one room, the hard limit that was there previously (based on a single tenant’s salary) is potentially doubled. Of course, this has affected the price of whole unit rentals as well. In order to rent the whole unit , one now has to compete with the combined price of renting out each room individually. This has caused the low end of the rental market, both room and unit, to creep upwards.

Lack of housing – Compounding the demand side problems highlighted above, is a lack of supply. The current squeeze on housing that has caused property prices to spiral upwards is also putting pressure on the rental market. With precious little housing for the present population, there are fewer people that can afford more than one property for renting out. Both the public and private housing market suffer from this effect, so as a whole, there will be fewer units for rent out on the market. Therefore, renters must compete by offering higher rents. Even those landlords that have property available for renting out will experience the following issue…

Property price increase – Now that property prices have escalated to near-record levels, investment-minded landlords have more options open to them, than to settle for lower rent.

Usually, a property investor will buy a property with the plan to use rental income to cover, or even exceed, the monthly payments on the mortgage. Eventually, it is hoped that rental income will have paid off the initial capital investment, allowing the investor to then realise capital gains by liquidating the property. When the market is stable, such landlords cannot afford to set too high a rental price, since having a reasonable monthly income is better than being undercut and not getting anything.

In this runaway property market, however, investors tend to perceive greater holding power, since their capital gains are already realised; the monthly rental becomes just icing on the cake, so they are more willing to hold out for better rental prices. Because this affects landlords collectively, the market experiences upward pressure across the board.

In addition, the high property prices mean that more households will find it expedient to rent instead of buy a property. This means more renters competing for fewer available units.

Choosy landlords – And then there are a few asset-rich landlords that go even further than the above. They would rather not rent out than decrease rental prices; we estimate that as many as 5% of the market are as such, willing to leave their property fallow than to rent out at prices they deem as beneath them.

These factors act to increase demand for rental units while restricting the rental supply, whether of whole units or rooms. Moreover, renters are at a further disadvantage, as they typically have a limited time frame in which to act. Usually, they will need to find a new place within a month of expiry of their current lease.

From the low-end of the rental market to top, there is upward pressure on prices. Is there any wonder then that rents keep going up?

What do you think? Let us know, and share with us by commenting below or in our social media channels, FacebookTwitter, and Google+.

Share

 Leave a Comment

(required)

(required)