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Thread: Solved the Rental spike mystery

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    Default Solved the Rental spike mystery

    http://www.todayonline.com/articles/268021.asp

    Thursday, July 31, 2008

    Solved the Rental spike mystery

    It was caused not by a jump in demand, but by a contraction in supply

    COLIN TAN


    LAST week, I suggested that the private housing oversupply may have been understated.

    This is because units that have been bought by investors can still be considered as part of the housing supply until they are resold or are tenanted. If the rental income cannot cover the mortgage payments and if the owners are highly geared, then they will have to sell the units sooner or later. If a greater proportion of owners are in the same predicament, the competition to sell will result in lower prices.

    But surely, finding a tenant cannot be a problem.

    After all, was it not so long ago that we heard complaints of unreasonable hikes in rentals. Between the third quarter of 2006 and the second quarter this year, the official rental price index went up by a hefty 69 per cent. This is almost 10 per cent each quarter.

    What were the factors responsible for this? Many attributed it to higher demand. It could not have been anything else. But was this really the cause?

    Amid the euphoria and excitement of the construction of the two integrated resorts and the anticipation of the tremendous spillover effects, the market misread the cause.

    Many attributed it to the surge in foreign talent arriving on our shores. For sure, more expatriates were coming but were their arrivals in such large numbers so as to cause rents to escalate to such dizzy heights?

    Even the new plans to prepare Singapore to accommodate up to 6.5 million people were loosely bandied around as proof that Government officials shared the same view. Investors bought the story and snapped up apartments at prices which presupposed a continuation of that strong upward trend.

    However, official figures showed the number of rental contracts actually contracted by 17.6 per cent in 2006 and remained flat last year.

    On the other hand, the average cost of rentals rose by 15 per cent in 2006 and 43 per cent last year. So, where are the missing expatriate households?

    Certainly, the high rents did cause some to leave Singapore, others especially Permanent Residents to purchase, and for those without a generous budget, to rent HDB flats.

    But there should have been at least a substantial if not dramatic nett increase in rental contracts. After all, they were supposed to have come in droves.

    The mystery is solved if we realise that the spike was caused, not by a steep jump in demand as many had assumed, but by a sharp contraction in supply. The result may be the same but the implications are different.

    The surge in en bloc sales had led to groups of tenants leaving their homes. The competition for homes simply drove rentals sky high.

    There are no official figures but I estimate that the supply of rental accommodation to have shrunk by at least a quarter to a third of the existing stock.

    Today, the rental market has stabilised. Those seeking homes would have found them by now either by buying, downgrading or leaving Singapore.

    What are the market implications?

    First, there are now no hordes of expatriates scrambling for accommodation. This means demand will lag behind supply. Rents will decline. Lower rents translate into lower yields.

    Second, for less prime units, it will come to a point when the low rents make no sense. It will be better to sell.

    Recently, a consultants report extolled the benefits of owning a home on Sentosa Cove and a $19,500 monthly lease was reported in a the news as having been achieved.

    Checks revealed that the 560-square-metre unit was sold in July last year for $8.59 million. It was probably a penthouse. This translates to a gross yield of 2.7 per cent. Does this even cover the interest on the mortgage?

    Lest we forget, we have not factored in property tax of 10 per cent or maintenance charges of about $12,000 a year for a penthouse. What about the additional security cost for Sentosa homes? Or the cost of furnishings?

    Eventually, the nett yield may dwindle to below 1.8 per cent certainly a high risk to take for such a low return.

    Is this situation typical of the otherinvestor units completing over the next12 months? I hope I am wrong, but I fear this may be so.

    The writer is the head of research at property consultancy Chesterton International.

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    Colin Tan's arguments sound very true.

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    Quote Originally Posted by Madeira
    Colin Tan's arguments sound very true.
    I look around and see so many properties in the midst of being completed..i really wonder how the rental market will hold up & in relation, prices. Act 1 was when supply contracted as Colin pointed out, albeit I think some of the demand was led by foreigners . Act 2 is where ther is a total reverse - demand will contract while supply will expand.

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    Quote Originally Posted by Boon
    I look around and see so many properties in the midst of being completed..i really wonder how the rental market will hold up & in relation, prices. Act 1 was when supply contracted as Colin pointed out, albeit I think some of the demand was led by foreigners . Act 2 is where ther is a total reverse - demand will contract while supply will expand.
    We did have a situation where supply outstrip demand from 2002 to early 2006. Rental for a 3 bedroom condo in Hillview fell to between $1200 to $1300 per month. Currently the rental there is still between $3000 - $3500 for a 3 bedder.

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