http://www.businesstimes.com.sg/arch...nd-home-prices
Published June 27, 2012
OCBC unit sees 10-20% fall in high-end home prices
Low interest rates, higher liquidity to buoy mass-market, shoebox demand
By Mindy Tan
EVEN as the gap between high-end and mass market residential prices hits a nine-year low, high-end prices are forecast to fall between 10 and 20 per cent in FY12.
According to the latest OCBC Investment Research (OIR) report, while the historic average price premium between the high-end and mass-market segment (over Q1 2004 to Q1 2012) is 98 per cent on a psf basis, the price premium has shrunk to 82 per cent in Q1 2012.
That said, OIR forecasts that prices would fall a further 10 and 20 per cent in FY12 following the ABSD measures - of which one key consideration was an additional 10 per cent stamp duty on property purchases made by foreigners and corporate entities - implemented in December.
Stated the report: "These measures are particularly onerous as, from 1st Jan to 8th Dec 2011, we had estimated that 29 per cent of all transactions were by foreigners and corporate entities. As a result, we saw primary sales in the high-end core central region (CCR) segment dip 79 per cent year-on-year (126 units sold) in Q1 2012."
Conversely, low interest rates and increased liquidity in the system is likely to sustain demand for shoebox and mass market units.
Indeed, the fall in interest rates between 2008 and Q2 2012 translates into an increase of almost 210,000 in the number of households above the income hurdle for properties between $600,000 and $1 million.
"To offer a perspective of this magnitude, if 5 to 10 per cent of these incremental households were to purchase private property, this would be equivalent to 70 to 140 per cent of total annual primary sales," said OIR.
Coupled with the ample liquidity in the banking system, this would underpin sustained demand for shoebox and mass-market units, and unhinge prices from historical norms of affordability based on domestic wage levels and rental yields, said OIR.
"All things considered, we forecast that mass market residential prices would increase by 0 to 5 per cent over FY2012."
Shoebox units can also expect to continue enjoying a premium over non-shoebox units over FY2012 and FY2013. However, this premium could diminish or even reverse after 2015, particularly for shoebox units in the outside central region (OCR), noted OIR.
Shoebox units currently enjoy a psf premium of about 7-9 per cent.
"This phenomenon is within our expectations given the demand for units at lower price quantums, and would likely continue over FY12-13 as liquidity remains abundant," said OIR.
Indeed, OCR shoebox prices might already be overextended. OCR transactions have mostly been in the same psf band as rest of central region (RCR) new sale transactions (mostly between $1,200 and $1,300 psf). Sales in the CCR, on the other hand, have mostly transacted between $1,600 and $1,700 psf).
According to OIR estimates, the number of OCR shoebox units could grow by more than 450 per cent by 2015.
In the event of this supply glut, OCR shoebox rents could fall 10-20 per cent, assuming that rents would fall to the level of a "reasonable substitute" - a HDB flat in a similar location with around 50 per cent more space.
"Based on a sample of the current market, we estimate that current rentals of an OCR shoebox unit indicate a net rental yield of around 4.1 per cent," added OIR.
In addition to falling rents, net rental yields of OCR shoebox units, particularly 99-year leasehold units, could expand closer to those of HDB flats in an environment of rising interest rates and higher supply of completed shoebox units, said OIR.
"From our sensitivity analysis, we found that if the yield spread between OCR shoebox units and substitute HDB flats should shrink by 25 per cent, we could see a 15-30 per cent decrease in the capital values of shoebox units in a bear case scenario," said the report.