Jan 15, 2007

Supply crunch to raise housing prices further

New units built will not keep pace with demand, says Citigroup report

By Fiona Chan

FEWER homes are being built than there is demand for them, which would drive home prices up further this year, a Citigroup report warned last week.
This supply crunch will add to the impact of a fast-improving economy and an influx of foreigners, which have already boosted demand for new homes.

The number of new homes coming on the market this year is expected to be only half the number of new households formed annually, said Citigroup analyst Wendy Koh. This mismatch in demand and supply will drive prices up at the lower end of the private property market, she predicted.

Overall, private home prices are likely to rise another 12 to 15 per cent, faster than last year's 10 per cent increase, she said.

Citigroup's report, while certainly not the first to predict rising home prices, is one of the few that places the spotlight on the supply situation in the market.

According to Ms Koh's estimates, only 7,000 new private homes and 5,500 HDB flats are expected to be completed this year. This pales in comparison with the 25,000 new households each year on average, she said.

What may further worsen the supply crunch is the red-hot collective sales market, which could result in some 3,500 homes being torn down this year alone, said property consultant Savills Singapore.

Although new demand for homes has outstripped any supply increases since 2002, this may be the first year in which it affects home prices, Citigroup said.

Previously, the shortfall helped soaked up excess supply created in the property boom of the mid- to late 1990s, said Ms Koh.

But now, any surplus HDB stock has been mostly sold and occupancy rates of private homes are nearing a 10-year high.

About 93.4 per cent of private homes are currently occupied, according to the latest data from the Urban Redevelopment Authority. The number of completed homes that remain unsold has also halved in the last year.

In the meantime, demand is expected to strengthen.

Citigroup economist Chua Hak Bin expects 100,000 new jobs to be created this year, of which only 40,000 to 50,000 will be filled by locals entering the workforce.

The remaining jobs will probably go to foreigners, who represent an immediate market for completed homes of all types.

This will further boost rising rentals which, along with economic growth, have already lifted sentiment among home buyers, said Citigroup.

'For the first time in three years, we believe the strong GDP growth is being felt by the man on the street,' it said.

A proposal to increase employers' contributions to the Central Provident Fund could also raise the affordability of lower-end homes.

All this means that home prices will see a considerable rise, which will filter all the way down to HDB flats, said Ms Koh.

Prices of mass-market private homes could rise by 5 to 10 per cent this year, while HDB resale prices may go up 5 per cent, she predicted.

Property consultants The Straits Times spoke to agreed that prices are set to rise this year, but most argued that there is no supply crunch in the property market.

Ms Tay Huey Ying, the director of research and consultancy at Colliers International, agreed that 'buoyant demand' for homes from both foreigners and locals will lead rents and prices up.

But she added: 'We do not think that we have reached a point where demand is in excess of supply in the immediate term.'

She noted that the expected rise in foreign workers may not translate into a proportionate increase in housing demand, as a large proportion of them may be Malaysians commuting to Singapore. Some may also rent rooms instead of entire homes, she added.

Also, home buyers can always turn to the secondary market for supply if there are insufficient new homes, said Mr Nicholas Mak, the director of research and consultancy at Knight Frank.

'There is still plenty of supply in the resale market,' he observed.

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