S’pore housing: Get the bigger picture right

Source : Business Times - 27 Aug 2008

THE media recently highlighted bearish analyst reports about the Singapore residential market. One, I recall, predicted a decline of 40 per cent over three years. Another forecast plunging rents in 2009 and consequent sharp falls in capital values. Perhaps this is why some owners have chosen to sell prime freehold units at implied gross yields of 4 per cent.

However, looking at the same data, I could not arrive at the same dour conclusion. I could not arrive at the same conclusion because I looked at data from other sources as well - in particular, HDB statistics. Since HDB rules on owners leasing out flats have been liberalised, the housing market is now a continuum. Indeed, on a per sq ft basis, rents commanded by well-located HDB flats are now comparable to those for private residential apartments, going by HDB and URA data.

The big picture in housing has always been driven by supply and demand - total supply and demand, not just private residential. If more households are created than housing units completed, there is upward pressure on rents and capital values.

Let’s look at supply first: A net 10,000 private residential homes are estimated to be completed in 2009. HDB does not publish completion data, but based on 2006 build-to-order data, only 2,400 units are estimated to be completed in 2009. In total, that’s 12,400 housing units.

Now let’s look at demand: According to the HDB’s website, sub-letting approvals in 2007 totalled about 12,800, or 50 per cent more than 2006. Yes, the HDB rental market is hot. For 2008, sub-letting approvals are running 30 per cent higher than in 2007, or about 16,300 units. This is consistent with data from the Department of Statistics on population and workforce growth in Singapore. The new (foreign) households are not living in tents. If they cannot afford private housing, they rent HDB flats.

We see that rental demand alone for HDB flats will probably exceed total private and HDB housing completions of about 12,400 units in 2009. Although the world economy is probably going to feel recessionary in 2009, Singapore will be somewhat insulated. This is because of a number of large projects coming on stream will boost job creation significantly in 2009. In particular, the integrated resorts (IRs) are expected to have 20,000 employees and create 50,000 new jobs overall. Given the nature of the IRs, I would expect a significant portion - perhaps 50 per cent of their employees initially to be foreigners, thus boosting household formation in 2009.

Nonetheless, I expect some softness in the private residential rental market relative to the HDB in 2009, as the bulk of completions will be private. For developments with adjacent completions, rents will be restrained by competition. Indeed, we see this happening already.

URA publishes comprehensive data on the property market. I believe it would be helpful for the market if the HDB published similar data, especially vacancy rates and building completion numbers. Even better would be for the authorities to publish composite data that amalgamates HDB and URA data.

Interestingly, despite the liberalised HDB rental market, HDB rents have risen despite volume growth. Demand has clearly been very strong. With average gross HDB rental yields of 6 per cent, or a net yield of about 5 per cent, HDB upgraders buying private property have a financial planning and investment choice. Upgraders who have the liquidity and risk tolerance may want to look out leasing out their HDB flats and taking a bigger mortgage, instead of selling their flats to finance the upgrade to private housing.

The net rental yield of about 5 per cent versus mortgage costs of about 3 per cent means a positive spread of 2 per cent. This 2 per cent on $400,000 delivers an additional $8,000 a year, assuming rental income does not rise with time. This would be handy in accelerating the reduction of the overall mortgage principal. Over the life of the mortgage, it could amount to more than $200,000 - a nice contribution to the retirement nest egg.

The author is CEO of financial adviser New Independent. He welcomes feedback at josephchong@ni.com.sg. This article is for information only. Readers should seek independent advice before making any investment decisions.