Singapore Housing Frenzy May Give Stern Lesson: Andy Mukherjee

By Andy Mukherjee

Oct. 5 (Bloomberg) -- Singapore's housing market, dead for five years, is suddenly gripped by frenzy.

Developers are falling over each other to buy older condominiums ``en bloc'' from their individual owners only to tear them down and build anew.

So far this year, such collective purchases have amounted to S$6 billion ($3.8 billion), three times the figure for all of last year.

The builders reckon that when the new apartments are ready there will be buyers who will compensate them for the elevated prices paid for the land because they, in turn, will have tenants willing to pay high rents.

For now, it's all going according to the script.

But if the excesses continue unabated, a collapse may occur, perhaps as early as next year.

The en-bloc madness is contributing to a shortage of apartments available for rent: The vacancy ratio shows that the market is at its tightest since the first quarter of 2001.

Tenants looking to renew their apartment leases in the past few months have been asked to pay 20 percent to 50 percent more by landlords. Homeowners feel confident amid the booming economy that they will be able to pass on their high and rising mortgage costs to tenants.

The Singapore economy probably will expand near the top end of the government's forecast of 6.5 percent to 7.5 percent growth this year, compared with 6.4 percent last year.

Job creation this year may come in at 125,000, beating last year's 113,000, which was the highest since the Asian financial crisis of 1997, says Jimmy Koh, head of treasury research at United Overseas Bank Group in Singapore.

With the city's own labor force near full employment, more new jobs mean more foreign workers looking for places to live.

Surfeit of Optimism

All of this is fueling optimism among property owners.

Two years ago, it was the landlord who wanted to lock in a tenant at a fixed price; now it's the tenant's turn to seek that assurance.

What was a slow and steady increase in rents until just a few months ago -- the Urban Redevelopment Authority's rental index for non-landed property rose a reasonable 8 percent between March 2004 and June 2006 -- is suddenly at a fast gallop. Perhaps, the acceleration is just the last-lap effect.

With the U.S. economy on the cusp of a slowdown, the property boom in Singapore may not have much farther to go, especially if cracks appear in the rental market.

By this time next year, a lot of new, empty apartments may be scattered around the city.

Driven by Foreigners

Nine out of 10 local households live in their own homes, typically a Housing Development Board flat. Fewer than 22,000 Singaporean families rent private condominiums and mansions.

Rents and prices of 231,000 private dwelling units and apartments are thus almost entirely supported by expatriate families living in Singapore.

For locals, the biggest costs are food, transportation and communication; for foreign-born bankers, fund managers, traders and consultants, it's the rent.

A few years ago, researchers at Singapore's Department of Statistics found that costs for shelter accounted for 40 percent of household expenditure for foreigners living in Singapore, compared with just 16 percent for the top 20 percent income- earners among local Singaporean households.

Rising rental costs, therefore, do not lead to a general discontent among the island's 3.5 million locals; their impact is limited to the 800,000 or so foreigners.

The presence of foreigners in Singapore is directly linked to the health of the world economy. After the Sept. 11 terror attacks, many global companies scaled back operations in Singapore and recalled or fired employees. The property market tumbled for the next several years.

Paying Too Much

Now, it's the recovery that appears excessive.

Developers are paying S$1,000 to S$1,300 for every square foot of plot ratio for en-bloc condominium purchases in top areas.

Two years ago, prime locations went for as little as S$650 a square foot.

Most property companies in the city ``have bought at least one or two sites,'' says Jeremy Lake, executive director for investment properties at real-estate brokerage CB Richard Ellis in Singapore. According to Lake, land prices have been driven by developers looking for choice residential development sites, particularly for high-end and the so-called lifestyle projects.

As a small, open and export-dependent economy, Singapore swims and sinks with the global tide. In their excitement to corner prime locations, developers seem to be taking for granted that the global economy in 2007 will be as good as 2006.

In the fourth quarter of 2000, a lot of people in Singapore had felt the same way about 2001.

(Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Andy Mukherjee in Singapore at [email protected] .