Why Australia’s housing woes and Singapore’s booming office sector are not the whole story
- The vulnerability of Australia’s housing market is typically viewed through the lens of Sydney and Melbourne, which ignores developments in Western Australia
- Meanwhile, bullish narratives, such as those around the fate of Singapore’s office market, also need to be treated with caution
It has come as a shock to Australians who were led to believe that interest rates would not rise before next year. Yet, in the space of just 10 months, the Reserve Bank of Australia – which has been criticised for misjudging the timing of the start of its rate-raising cycle – has increased borrowing costs by 3.25 percentage points.
Australia has one of the world’s highest household debt-to-income ratios and a menacing “mortgage cliff” facing many mortgage borrowers this year. Two-thirds of the 35 per cent of loans on fixed-rate terms expire this year, leaving borrowers with huge increases in rates when they roll over to variable rate loans, currently just under 5 per cent. This means Australia is at the sharp end of the global monetary tightening campaign.
However, the performance of the country’s housing market is viewed through the prism of Sydney and Melbourne. Its two biggest markets have suffered peak-to-trough declines of 13.5 per cent and 9.6 per cent, respectively.
Far too little attention is paid to Perth, the capital of the state of Western Australia. Prices are down less than 1 per cent from their peak in July 2022 there and even rose 2.4 per cent in the 12 months to February, according to data from CoreLogic.
A commodities hub and one of the largest iron ore suppliers in the world, Western Australia’s economic and property cycles differ markedly from those of the nation’s east coast.
What is more, Western Australia’s income per capita is the highest in the country, turbocharging a housing market driven by surging demand and tight supply. Trent Fleskens, host of the Perth Property Show, noted in a podcast recorded on January 10 that Perth residents “make more income than anyone on the east coast except for Canberra and our house prices are less than half those in New South Wales”.
These huge divergences within Australia’s property market – Adelaide and Darwin have also experienced minor peak-to-trough declines in prices – show that even the riskiest corners of Asia’s real estate industry are more resilient than often assumed.
However, as other economies across the region have reopened and borrowing costs have risen sharply, the drivers of Singapore’s office market have come under sharper scrutiny. Jeremy Sheldon, head of office leasing advisory Asia Pacific at JLL, said “Singapore’s popularity surged under Covid, but now it’s no longer the only attractive option [for occupiers and investors]”.
Singapore’s heavy reliance on the technology sector as a source of leasing demand has emerged as a vulnerability. Tech companies have accounted for a staggering 40 to 50 per cent of gross leasing activity in the past two years, dominating large transactions.
Some leading tech companies such as Google have surrendered space while rents for larger floor lettings – the leases big multinationals tend to sign – fell almost 6.5 per cent quarter on quarter in the last quarter of 2022, according to data from Savills. Rental growth for grade A offices in the core central business district as a whole is expected to slow to just 1 per cent this year, CBRE estimates.
While the severity and duration of the tech-driven slowdown in Singapore’s office market remain unclear and tight supply will help cushion the impact on vacancy and rents, the susceptibility of the market to the acute pressures facing Big Tech show that even a safe haven has its weaknesses.
Narratives matter, especially in real estate. But even the most compelling ones are less persuasive when subjected to scrutiny.
Nicholas Spiro is a partner at Lauressa Advisory
