Private home market reaching equilibrium?

by Ong Kah Seng

04:45 AM Nov 23, 2012

It has been a pulsating year for Singapore's private housing sector, with homebuyers' aspirations remaining firm even as prices and volumes defy conventional market cycles to hit record highs, but there are signs that the market is now heading towards equilibrium.

In today's market, speculation no longer drives the property buyer following the implementation of sellers' stamp duty in January last year for sales that take place within four years of the home purchase. The purchase decision largely comes from a desire to seek out investment opportunities and fulfil ownership aspirations.

These behavioural drivers will have to be managed by the authorities if they want to ease the rate of increase of home prices. Indeed, the current measures may be more effective than previous ones as they target underlying economic, social and homebuying fundamentals.

By now, the lack of investment alternatives due to the persistent low interest rate environment has become the oft-heard explanation for the continued preference for property purchases. A private home will still be a more familiar and safer choice among many property investors, compared to strata offices, shops and factories. Notwithstanding the record high prices, private homes are still perceived to be a good long-term investment.

The easy access to loans with longer tenures often encourages buyers, even those with affordability issues, to satisfy their need for instant gratification. So the curbs introduced last month to cap mortgages at 35 years and reduce the loan-to-value ratio for those that exceed 30 years or extend beyond the borrower's retirement age of 65 years can help mitigate the risks of defaults and failures in property investments, especially if interest rates eventually rise.

Private home prices, especially those of suburban housing, ran up during the periods following the implementation of the United States Federal Reserve's first round of quantitative easing (QE1) in end-2008 and the second round (QE2) in end-2010, but the market contexts were materially different from the present situation.

In 2009, private home prices fell by an average of 15 per cent in the first quarter, hit by the fallout of the Lehman Brothers collapse. The severe drop and the subsequent economic stabilisation and stock market recovery, partly driven by QE1, provided the platform for the strong rebound of 16 per cent in 3Q 2009, as opportunistic investors, including speculators, resurfaced.

The market also jumped in the last quarter of 2010 following QE2 implementation, with prices largely shrugging off the cooling measures effected from September that year.

Against that backdrop, many buyers are now conditioned to believe that property prices will surely rise following the Fed's third round of quantitative easing (QE3). Indeed, in September, when the US central bank announced the measures, there was a strong showing here in both the developer and resale market.

Typically, these buyers believe the ample liquidity will raise home prices next year, and although the high sellers' stamp duty will restrict reselling in the first four years of purchase, paper gains are still psychologically uplifting for owners and investors.

The market has also become more innovative and vibrant, as developers come up with new offerings or incentives to woo homebuyers in the face of fresh tightening measures and new supply.

Still, with Singapore's subdued economic prospects and with Asia increasingly losing its resilience, homebuyers are now expected to be more restrained. This will translate into a more stable market amid more competitive pricing next year.

The private home market rose 0.6 per cent in the third quarter to hit a new all-time high and this has also led to more buyer resistance, especially as new cooling measures target specific demand fundamentals.

The current price levels have also almost fully stretched buyers' affordability, with suburban developer sales averaging S$1,000 to S$1,300 per sq ft, compared against lukewarm demand for resale properties in city fringes going for S$1,200 to S$1,400 psf.

Although resale property requires immediate financing and HDB upgraders often like to be in the same locality, an investment-savvy individual should choose the latter, unless it exceeds his or her affordability. The current pricing is thus the limit for suburban condominiums and any further increase, even driven by low interest rates and QE3, is likely to meet with buyer resistance.

While the lack of investment alternatives and low interest rates drive the housing market, what really underpins the property's potential is beyond the mere low cost of funds. These include the tenant demand base, the property's inherent characteristics, as well as long-term infrastructural improvements and enhancements.

Homeseekers who did not purchase during the 2010 to 2012 market frenzy are generally more risk averse and prudent, and are thus expected to critically evaluate their buying options in the context of ample choices next year. This will curtail further price increases and very likely, prices will ease as competition intensifies.

Ong Kah Seng is Director of Research at R'ST, an independent property market research company in Singapore.