Bubble trouble?

Bubble trouble?

By Fiona Chan - Dec 9, 2006
The Straits Times
The property market is seeing a buying frenzy, with investors snapping up new homes at skyrocketing prices. Is a bubble forming? Fiona Chan finds out.

IT WAS a brand new condominium in Katong that put out almost no publicity - but it drew a mob of buyers the minute it opened its doors.

Clutching their chequebooks, hundreds of Singaporeans thronged the Grand Duchess at St Patrick's one weekend last month to secure the choicest apartments.

'When we opened the gate, we thought it was just a small wave coming in. We did not know it was a tsunami,' recalled Mr Vito Koh, group general manager of developer United Industrial Corporation (UIC).

'When we started taking orders, all hell broke loose.'

So many came that the line of cars waiting to get into the showroom's carpark extended down the whole length of St Patrick's Road.

Demand was so strong that UIC raised prices twice over the weekend. But hopeful buyers were still beating down the doors 36 hours later, when the last of the 121 freehold apartments had already been snapped up.

'We had to turn away hundreds of people, and we had not even placed any ads,' said Mr Koh.

Two days after Grand Duchess' dramatic sell-out, buyers snapped up all 85 units at another condo across the island - The Ford@Holland - within hours.

Buying frenzy has reached such heights that some eager buyers have taken to camping overnight outside showrooms.

A group of them stood in line from 3am on a Saturday last month to snare units in The Metropolitan condo at Redhill. The queue for the 99-year leasehold project grew to more than 100 people in six hours.


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LAST MONTH: People packing the showroom of the freehold condominium Tribeca at Waterfront at its soft launch. CDL sold 70 per cent of the 86 units it released on the first weekend at $1,420 psf. The project sees a fair number of potential buyers even though condominium prices have gone up. Photo/ Ng Sor Luan


These condos are just three examples of new launches that are riding the wave of a rising property market, one that is rebounding with a vengeance after long, hard years of lacklustre demand and sluggish prices.

Not only have private property prices risen for 30 months in a row, luxury homes are smashing all price records with each new launch.

St Regis Residences at Tanglin Road led the way, setting a new record of $3,000 per sq ft (psf) for its ultra-luxurious apartments.

Tales of easy profits are once again the talk of the town as homes at The Sail @ Marina Bay have almost doubled in price since its launch two years ago.

As a result, all the major developers - including Far East Organization, City Developments and CapitaLand - have come out of hibernation to raise prices of their projects across the board.

It is like a replay of the property fever that gripped Singaporeans in the early 1990s.

Overnight queues and packed showrooms were the norm then as property investors vied desperately for homes they believed could only go up in price.

Buyers paid 'queuers' to stand in line for days, and apartments were 'flipped' within days for handsome profits. Even the queue numbers for launches changed hands for tens of thousands of dollars.

But it all came to a spectacular stop in 1996 when the Government stepped in with anti-speculative measures to cool the market.

Home prices, which had been surging for five years before that, nosedived.

They plunged further during the Asian financial crisis in 1997 and hit rock-bottom in 1998. This kicked off the longest market downturn in recent decades.

Is history repeating itself? Does the current buying craze point to yet another housing bubble?

The good news: No, there is no bubble, at least not for now.

Property 'bubbles' are defined by widespread speculation and prices running ahead of economic fundamentals.

Most market watchers say that both these characteristics are conspicuously absent in this property recovery.

Instead, these experts believe that this time round, most buyers are genuine 'owner-occupiers' or investors, rather than speculators.

Runaway home prices are seen only at the top, while the rest of the market is on a slow and steady climb supported by the strong economy.

Limited speculative buying

STILL, some experts point to The Sail and the sought-after properties in luxury enclave Sentosa Cove as signs that a bubble may be building up.

Units at these condos have changed hands for hundreds of thousands in profit even before they are completed.

But industry watchers say speculative activity is now confined to a handful of niche properties.

There have been just 661 sub-sales of apartments so far this year, less than a fifth of the whopping 3,629 such deals at the height of the profiteering frenzy in 1996.

In sub-sales, which are used to gauge speculation, apartments change hands before they are even completed.


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JULY 1996: At the height of the property fever in 1996, showrooms were packed with people eager to get a piece of the action. Overnight queues, such as this one for Ardmore Park, were a common sight, and it was not uncommon for interested buyers to pay "queuers" to stand in line for them.


Rampant speculation is the main reason a housing bubble forms. When this happens, home prices get driven up so much that genuine buyers cannot afford them, said Ms Tay Huey Ying, director of research and consultancy at property firm Colliers International.

Eventually, 'speculators will find that they cannot find anyone to buy their properties at the prices they want, so this will set off the price drop of the bubble', she said.

In the case of 1996, the Government intervened to burst the bubble with a series of anti-speculative measures, including tighter credit limits and taxes on capital gains.

Immediately, the number of speculative deals plunged.

The number went up in a mini-recovery in 1999 but has stayed low since.

Limited speculation means the current rise in home prices is driven by genuine buyers, say property consultants.

'If there was a bubble, the buyers would be people with no money to hold on to their properties,' said Mrs Ong Choon Fah, executive director of DTZ Debenham Tie Leung.

But this current crop of buyers are 'people who can hold on', she said.

In sync with the economy

EXPERTS say genuine home buyers are returning to the market because the economy is doing better.

Ms Regina Lim, a property research analyst at investment bank UBS, said prices are rising alongside economic growth rather than outpacing it.

The last two bubbles in 1996 and 1983 coincided with the only two times property prices outpaced GDP growth.

'Prices now are still lower than 2001 levels, and there is a lot of room for prices to grow if you look at GDP growth,' she said.

Home prices rise as the economy improves because higher wages give people the means and security to buy property.

This explains the strong local demand at The Metropolitan, Grand Duchess and The Ford, where up to 85 per cent of the buyers were locals.

There is no bubble as long as home prices continue to keep pace with the economy, said Mr Song Seng Wun, head of research at CIMB-GK.

'Our estimate is that economic growth will be 8 per cent this year, and the property price index looks set to go up 7.5 per cent, so this is perfectly acceptable,' he said.

Confined to luxury segment

BUT while home prices as a whole are climbing at a measured rate, those at the top end have shot through the roof.

Luxury home prices surged more than 20 per cent in the first nine months of the year, far outstripping the economy.

A home that cost more than $2,000 per sq ft was a rare luxury 10 years ago. But that was before posh apartments such as St Regis and Ardmore II, which have long crossed those levels.

And where prices know no bounds, neither do speculators, who have been descending like vultures on high-priced carrion.

Savvy speculators are reaping average gains of more than $600,000 at The Oceanfront in Sentosa Cove, with one lucky owner netting $1 million within only two months.

In this segment, there is indeed 'some froth', said Mr Soong Tuck Yin, director and head of Singapore research at Macquarie Securities.

If a bubble builds up in the luxury segment, will the eventual crash set off a price fall that may snowball and pull down the whole market?

Even here, market experts are sanguine.

Luxury properties usually have a 'price floor'', making them relatively cushioned from the effects of a bubble, analysts say.

However, the fortunes of the luxury property segment is heavily dependent on foreign buyers, who have been fuelling such demand.

Savills' director of marketing and business development Ku Swee Yong estimated that they bought up to an unprecedented 40 per cent of new luxury homes launched in the past few months.

Fortunately for Singapore, most of these foreign buyers are here to stay, experts say.

Mr Lee Wee Liat, director of consulting and research for Asia at DTZ, said about half the foreign demand is made up of genuine home buyers.

Mr Jonathan Ng, an investment analyst at UOB, said that foreign buyers have no psychological barriers to purchasing homes here as they did not go through the property crash. Also, homes here are underpriced compared to places like Hong Kong, where top condos are going for double the price at $6,000 psf.

Betting on casinos

EXPERTS also say that the upcoming integrated resorts will continue to buoy foreign demand for property in Singapore.

These are likely to lead to a sustained increase in property prices, further popping worries of a bubble, say analysts.

Mr Ng said: 'In the case of Macau, casinos were liberalised in 2001, and property prices have doubled since then because of the exuberance in the market.

'Generally, when there are more visitors coming in to a country, people employed in the economy would have more money to spend. They feel richer, and this spills over to assets.'

With $5 billion being pumped into each of the IRs, land and property prices are likely to go up, said Mr Ku of Savills.

'If $5 billion goes into your neighbour's house, your own house valuation will go up for sure.'

When to worry

ALTHOUGH the experts say there is little need for worry, potential home buyer Andrew Wan, 26, wants to know if prices will keep rising and by how much.

'If I wait a year or two, will the market have shifted so much that I will be paying 20 to 30 per cent more than now?' asked the civil servant.

Industry watchers say that while prices may not rise that much, the property market is headed for sustainable growth over at least the next year.

UOB's Mr Ng said: 'I do not see anything domestic that would trigger a downturn as yet, so it would have to be something external and major for home prices to drop suddenly now.'

Most experts say the current rise in prices is simply part of a regular property market cycle. But they also caution that any upswing may turn into a bubble if buyers get carried away.

There are three warning signs to watch out for, they say.

These are a spike in speculation, runaway values filtering down from the top segment to the whole market and a slowdown in economic growth.

In fact, some economists are already worried that accelerating property prices may soon outpace economic growth, which is expected to slow next year.


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DOUBLE IN TWO YEARS: The prices of units at The Sail @ Marina Bay have almost doubled since the project's launch two years ago, adding fuel to talk that hugh profits can be made easily in property speculation. Photo/ Lim Wui Liang


Mr Song of CIMB-GK said: 'What we have to be careful of is a double-digit annual gain in property prices, while economic growth remains at around 5 to 6 per cent.

'At that point, there will be hints of excess liquidity, and it will seem like we are in the early stages of a bubble, which will build on itself.'

But what potential home buyers like Mr Wan should also beware of, say property experts, is that what goes up must eventually come down.

The cyclical nature of the property market and possible economic shocks suggest a property downturn 'in the near future'', say some.

'We are in an environment where the United States economy is looking a bit shaky, so being too excessive in terms of pushing property may result in a crash again if we were to hit an enormous bump,' said Mr Song.

Mr Nicholas Mak, director of research and consultancy at Knight Frank, expressed another concern.

He said that previously, there was a three-year upswing between 1993 and 1996, and then a 'mini-recovery' of 1-1/2 years between 1999 and 2000.

'Currently, we have already seen an upturn of almost 2-1/2 years,' said Mr Mak.

If most upturns last for just three years, he said it may be possible that 'we only have six months left'.

But other property experts are confident that prices will continue to rise, and that the rebound in the luxury segment will eventually filter down to the rest of the market.

In fact, most seasoned property players - such as CDL's executive chairman Kwek Leng Beng - are bullishly predicting a rise in home prices of 10 per cent for next year.

'The normal market trend is a seven-year cycle,' said Mr Kwek.

'We are already long overdue for a property recovery.'

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