Is the Singapore property market headed for a fall?

Property has been enjoying a boom like no other in the past two years but if Standard Chartered's experts are right, the good times are coming to an end.

The bank's analysts have turned markedly bearish, with a report predicting residential rents and prices plunging 30 per cent over the next three years.

This will be a painful reversal given that prices surged 18 per cent last year - as Singapore bounced back from the global financial crisis - and a further 6 per cent in the first nine months of this year.

Stanchart sees problems ahead, including slower population growth due to stricter immigration policies and the unprecedented supply of completed homes coming onstream.

Rock-bottom interest rates could also edge up from 2013, further dampening the market. The debt crisis in Europe and concerns of a severe downturn in China could also have a significant impact on demand and prices.

After four rounds of cooling measures since September 2009, the Urban Redevelopment Authority (URA) has found price gains moderating for eight consecutive quarters.

They inched up just 1.3 per cent from the second quarter to the three months to Sept 30.
Transaction volumes also dropped 25 per cent in the third quarter as global uncertainty and stock market volatility took their toll on sentiment.

So with all asset classes said to move in cycles - the classic boom and bust scenario - is the Singapore property market headed for a sustained downcycle and a correction in prices?

Economic outlook

The euro zone crisis is one of the big factors determining where the property market heads, experts note.

Singapore's economy, buffeted by global weakness and uncertainty, is expected to grow at a sluggish 1 per cent to 3 per cent next year but that could worsen if Europe's woes escalate or a full-blown financial crisis erupts.

Experts add that while any contraction in the global economy will hurt Singapore, the extent remains unknown as the European crisis plays out in slow motion.
There are also other mitigating factors in play.

Property markets go through cycles, just like economies. Only if you are in an emerging market where there is a long period of strong economic growth, might you have a long property market upcycle.

Employment and businesses are affected when the economy contracts so this will affect buying sentiment and the ability to buy homes.

Prices will fall if the major global economies deteriorate as Singapore's economic growth will be affected.

DBS economist Irvin Seah said slowing economic growth typically places a heightened risk of depreciating asset values.

But housing demand in Singapore has remained in good shape as unemployment remains low with wages continuing to rise.

The local property market is also known to be fairly resilient, experiencing just a short blip during the global financial crisis before a sharp rebound at the end of 2009, Mr Seah noted.

However, he highlighted the scenario of a hard landing in China - Singapore's largest export market - as possibly impacting the market most severely.

But the risk of a hard landing in China is 'moderate' and not big enough to warrant concern as yet.
A recession coupled with job losses is likely to drag prices down.
The moment when potential buyers feel insecure about their future source of income is when they pull back from buying or begin to divest.

In a downturn, foreign capital could also become defensive and pull back from investing overseas, some experts say.

On the other hand, while another global crisis might also dampen sentiment, it might lead to more money being pumped into the markets as governments act to salvage their economies.

Already, there is talk of a third round of quantitative easing by the United States Federal Reserve.
These high levels of liquidity flooding the market might find their way to Asia and continue to support property prices.

Interest rates

Low interest rates that are making mortgages far more affordable have also helped to support the housing market.

And with the United States Federal Reserve pledging to keep rates low until mid-2013, rates here are also likely to remain flat.

However, Stanchart property analysts say that low borrowing costs are not enough to sustain the market.

The increase in the public housing income ceiling and the lower pricing of new HDB flats - expected to siphon demand from the private sector - should still lead to price falls.

Private home buyers are estimated to spend more than 38 per cent of their monthly gross income on mortgage repayments even though rates are only at 1.1 per cent, the report noted.

This is slightly higher than the Government's target of 30 per cent to 34 per cent. 'If interest rates normalise to the 10-year average of 4 per cent, we estimate the proportion of income spent on mortgage repayments to rise to 50 per cent,' it added.

Rising interest rates are expected to reduce affordability and trim market demand, possibly leading to prices dipping as well.

However, as some experts note, any decision by the US Fed to raise rates will mean that its economy is finally on the mend and that could signal that the global economy is out of the doldrums, which is good news for investors.

Slower population growth
Tighter immigration policies have recently been introduced in response to unhappiness over strained infrastructure and congestion.

The Stanchart report noted that population growth is expected to be halved to 1.5 per cent to 2 per cent for the next three to five years as the Government looks to encourage productivity gains and reduce its reliance on foreign workers.

But this reduction might have a knock-on effect on leasing demand and rents, especially with foreigners - including permanent residents - making up 37 per cent of the population.

Experts note that if demand from tenants falls, rents and correspondingly yields - which are already low at 2.6 per cent to 3 per cent - will fall, with prices following eventually.

But AmFraser Securities equity analyst Lau Wei Chong noted that although the intake of foreigners has slowed, the Government maintains its open door policy to talent, which will see the population continue growing. This continued influx will mitigate any sharp fall in property prices, he said.

Oversupply

The large number of completed units from the bumper supply of state land releases raises the question of whether these homes can be absorbed by the market.
The report noted that the number of homes to be launched for sale is similar to that in 2000, when prices plummeted 20 per cent.

As of the third quarter, 37,400 homes are in the pipeline seeking the required pre-requisite conditions to be launched.
This is similar to the 36,400 units in the first quarter of 2008 and the 37,500 units in the second quarter of 2000.

Prices fell 25 per cent in 2009 and 18 per cent in 2001, the report pointed out.

Completions are also expected to peak in 2015 with a staggering 47,000 units built. This is almost three times the number of private homes developers sold last year, which was itself a record.

The unprecedented supply of new HDB flats - 50,000 in total for this year and next - will also divert buying demand from the private sector.

However, the population has expanded by about 2.8 per cent a year over the past 10 years while the number of completed homes has increased by 2.1 per cent a year.

Given the way the growing population has outpaced the housing stock, this has led to a backlog of demand for homes.
If the economic crisis is not too severe, this will help to mitigate the sharpness of any price correction.

Source: The Straits Times –27 Nov 2011