Thursday, July 24, 2008

Oversupply Worse than Expected?

There is a distinct possibility of lower prices with so many developmentsset to be completed at the same time

Colin Tan

RECENT arguments against earlier predictions of a private housing oversupply are overblown, and cannot be further from the truth. In fact, those predicting an oversupply are probably understating their case. How bad the market fares will depend on the economy. But, leaving the economic factor aside, demand and supply factors alone dictate that the market has to correct in a significant way.

But before we go into that, let us examine the construction bottleneck argument. It is claimed, with justification, that this will result in significant delays to future supply. By one industry estimate, only 60 per cent of the 30,000 units forecasted will be completed as scheduled.

But when does completion date matter when new units these days are sold off-plan, even before construction starts? What will impact prices is surely the timing of the sale. Nothing can prevent all 30,000 units from flooding the market within the next 12 months if developers choose to launch. By the same token, nothing can force developers to sell if they don’t want to.

It is easy to forget that there was very little new supply from September last year to May this year. But, in a matter of weeks, this number has probably tripled, or even quadrupled. A friend with an avid interest in properties remarked to me recently that he will need a few months just to visit all the show units.

And while some have predicted a 30-to-40 per cent price correction for the luxury/upper-tier segment, it is interesting to note that this segment actually saw far fewer launches in the past weeks. So, in the current market, the luxury/upper tier segment actually faces less competition and hence, less pressure to lower prices. However, it does not mean it is in a healthier position, as buying for this segment has dwindled to a trickle.

When does completion actually matter in the housing demand and supply equation? I would say, it is when the market is investor-dominated. When buying is mainly done by owner-occupiers, the moment a unit is sold, it is taken out of the supply equation. Supply gets depleted. This was the situation in the past. We determine whether the market is oversupplied or not by the amount of units left unsold versus potential demand.

But, when the market is investor-dominated, sold units held by investors remain in the supply equation as investors need to sell onward to owner-occupiers or have them tenanted.

By my conservative estimates, more than 50 per cent of the units sold in 2006 to 2007 were bought by investors. This is because the high prevailing prices then were beyond the affordability of most owner-occupiers. This is supported by a recent National University of Singapore study which showed that the affordability of owner-occupiers for private housing has declined significantly in recent years.

Some projects, such as The Sail at Marina Bay, Marina Bay Residences and One Shenton, as well as those on Sentosa island, will most definitely have a higher proportion of investor buyers — as high as 60 to 80 per cent — because there are few of the amenities nearby, such as schools, which are usually desired by owner-occupiers, unless a case can be made out that the majority of units are holiday homes for the super-rich, or are bought by singles. For singles, their level of affordability is even lower.

Between the second quarter of 2006 and third quarter of 2007, developers sold an astounding 22,651 units. This translates to an annual average pace of about 15,100 units, or about double the long-term average absorption rate of about 7,000 to 8,000 units. Conservatively, this means at least 12,000 “sold” units remain in the supply equation.

When these investor-owned units are completed, someone has to occupy them. If rentals then cannot cover mortgage payments and if owners are highly-geared, they will have to contemplate selling the units sooner or later.

If more owners are in the same predicament, the competition to sell will result in lower prices.

The writer is head of research at Chesterton International.