Published October 5, 2006

Price momentum in the property market

PRIVATE property prices are picking up faster than expected. Flash estimates released this week by the Urban Redevelopment Authority (URA) showed that private property prices rose 5.8 per cent in the first three quarters of the year. That is already higher than the 5 per cent whole-year gain expected by property consultants early this year. Compared with the third quarter of 2005, prices have advanced 7.3 per cent.

Some analysts now believe prices could jump by as much as 7-9 per cent for the whole of this year. Against the backdrop of a generally bright economic outlook for Singapore and the region, and coming off falling and then stagnant prices for the last six years, the climb thus far has been within reasonable bounds. Consultants, however, point out that it was the high-end projects which drove the index up. The mass-market projects, especially those in the suburban areas, have yet to see significant gains.

Demographics will explain this, and perhaps also points to continued limited upside on the mass-market projects, as long as rationality prevails. According to the Singapore General Household Survey 2005, the average household earned $5,400 a month last year, growing a mere 1.8 per cent a year between 2000 and 2005. It is recommended that no more than 30 per cent of gross income be spent on housing. So for an income of $5,400, a comfortable property to invest in would be around $375,000, with 80 per cent funding from a 30-year loan at 5 per cent interest. Meanwhile, URA statistics show that the median price of a condominium is near $7,600 per sq m, or some $700,000 for a 1,000 sq ft unit. In other words, private housing is already beyond the means of average households. But with that kind of budget, there is no lack of choice in the public housing market.

Meanwhile, the top 10 per cent of households raked in a monthly income of $16,480 last year. Despite their higher base, they also saw a faster increase in their income between 2000 and 2005 - at 2.8 per cent a year. At last year's income, these households would be comfortable with properties worth $1.25 million based on the same loan terms. A 1,200 sq ft condominium at a higher price of $800 per sq ft works out to just over $1 million.

The affordability issue explains the sluggish price recovery in the suburban mass-market projects. In the top-tier market, the top 10 per cent of households can afford to pay more for their housing. They are also more confident of their future prospects, given their faster rising income. Furthermore, the top-end projects also attracts overseas demand.

Now that the momentum has picked up, it is likely to continue in the same direction. The headline numbers of property price increases may influence those who can afford it to catch the boat. After all, property has proven to be a good investment for the last 31 years. Between 1975 and now, it returned 7.6 per cent a year versus 7.2 per cent for Singapore's blue chip stocks. But investors should weigh the risks for their unique circumstances.