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H2 Econs - [Demand & Supply] Why are home prices rising in a pandemic?

Every JC Economics student would know that in a recession, triggered by the COVID-19 pandemic, incomes fall. Thus demand for goods and services deemed "normal" (with a YED > 1) would decline, since consumers have less purchasing power and are less able to afford these goods and services. Housing, being a big-ticket item, is regarded as a luxury good; falling incomes should result in a substantial fall in demand for housing, since workers who face falling incomes or get unemployed would clearly be unable to buy their own homes. How then do we explain the surging home prices in Singapore since the pandemic started?

Given the tendency for SEAB/Cambridge to set A Level questions based on current affairs in Singapore, we hope to give all of you a leg up by helping to analyze exactly why it is economically consistent for home prices to be surging despite the pandemic.

1. Falling Supply from Construction Delays

One of the biggest impacts of heavily tightened borders to combat the pandemic, has been the significant shortage of foreign workers needed for home construction. The delays in both Build-to-Order (BTO) flats and condominiums have led to a sharp drop in total housing supply in the Singapore market. A fall in supply would push up prices, as homebuyers have to outbid one another in order to secure a home for themselves. Adding to that is the rising cost of foreign workers, due to the sharp decline in labor supply, which further intensifies the supply squeeze in the housing market because it becomes more expensive for property developers to build and sell homes. All in, the falling supply would put an upward pressure on home prices,

2. Changes in Tastes and Preferences for Resale Flats

Of all the property segments, resale flats (both HDB and condominiums) have seen the largest surge in prices. This is largely driven by the increased uncertainty about the completion timelines for properties that are still under construction, both HDB and condominiums alike. This has driven a large swarth of buyers who prefer the certainty of being able to move into their new homes by a certain deadline, rather than facing the uncertainty of construction delays. This change in tastes and preferences contributed to a significant increase in demand for resale homes. Coupled with a highly inelastic supply curve, it is no wonder that home prices have been on a tear.

3. Falling Incomes does not mean Falling Demand for All Housing Types

At first glance, the jaw dropping headlines of million-dollar HDB flats seem completely incompatible with the -5.8% GDP growth Singapore experienced in 2021. However, on closer inspection, this is precisely consistent with a pandemic year. Falling incomes and unemployment would definitely have hit certain households hard, and because HDBs represent the most "basic" of housing options in Singapore, households who were residing in private housing and faced with falling incomes would likely "downgrade" to public housing. Households who are no longer able to service the mortgage of a private home would then be forced to sell their condominiums and buy a HDB flat instead. This would then contribute to a rise in demand for large HDB units in matured housing estates, leading to the record-setting number of million dollar HDBs. Combined with newlyweds who choose to shun BTOs due to construction delays, it comes as no surprise that the HDB resale prices have been particularly robust. Additionally, with generous government grants and homeowner-friendly repayment options, current owners of HDB flats are seldom under pressure to sell their homes even in the event of job losses and unemployment, restricting the supply that could potentially come onto the market despite a recession. Together, a relatively stable supply and rising demand would bring about the huge surge in resale HDB prices observed.


There are definitely sound demand and supply reasons behind the recent surge in home prices. Focusing excessively on the impacts of a pandemic and a recession, would cloud the true drivers that are influencing home prices. Being able to look beyond the headlines and utilize the ceteris paribus assumption intelligently can help you to undercover the true economic factors behind the surging real estate market. After all, the property market is governed by free market forces, and demand and supply are not merely theoretical hypothesis, but have very real applications to understanding the world around us. Reconciling real-life economic scenarios with economic theory is a key skill needed in essay writing and answering CSQs in A levels and it is thus important to learn to dissect and analyze economic phenomena and not make sweeping generalizations.

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