Published September 19, 2009

Show me the money

Time to tread with care

There is a high possibility of further cooling measures if residential prices continue to escalate ahead of economic fundamentals


THE government this week announced several tightening measures for the property market. This is in response to increasing worry that the local property market is getting a a little frothy. In his previous speeches, National Development Minister Mah Bow Tan has explained the role of government in the property market.

In his speech in Nov 26, 2008, Mr Mah highlighted the need for property prices to move in tandem with underlying economic growth. He also said that when housing prices are going up, speculation and fear of missing the boat can cause home buyers to pay more for their property than is justified based on economic fundamentals and this can lead to bubbles being formed. Time and again, the government has acted to cool down the property market when it became too hot. The recent measures were described by most analysts as being 'measured'. They shouldn't dampened the sentiment too much. But it did show that the government is prepared to impose cooling measures.

So this week, I've decided to do an update on the property market, looking at the latest available numbers. Last year in this column, I plotted a chart which showed how the Singapore's gross domestic product (GDP), the URA private property price index and the Straits Times Index moved since 1975.

The chart showed that up till 1993, the stock and property market more or less tracked the growth of the economy. Then the property market broke away in 1994, 1995 and 1996. In hindsight, that huge deviation of property prices from GDP has proved to be a bubble.

That bubble was pricked by the government's anti-speculative measures, and later by the Asian Financial Crisis. Property prices then corrected severely and closed the gap with the growth of the domestic economy. In 2007, property prices sprinted ahead again. The correction came soon after in 2008, but in the last couple of quarters, prices have risen again. But as per URA's second quarter data, private property prices don't seem to have strayed too far from the economic fundamentals. How about affordability? Here, the numbers look reasonable as well. I take the average income of the 71st to 80th percentile households in Singapore. According to the Department of Statistics, the average monthly income for this group was $8,010 in 2006, $8,730 in 2007 and $9,720 in 2008. I then compare these to the median price of condominiums in that three years. Assume the condo is 100 sq m. The loan is 80 per cent over 30 years, and the rate is two percentage points above the one-year interbank rate. In the above scenario, the mortgage payments these households need to fork out amount to between 30 and 40 per cent of their income. This is still within the recommended range of how much each household should set aside for mortgage payments.

Next we look at the return for an investor who has bought a condo and leased it out. Here, I divide the median rental over the median price of non-landed private properties. The yield averaged about 4.6 per cent between 3Q2001 and 2Q2009. Then, I assume the investor has taken up an 80 per cent loan and the interest is also two percentage points above the one-year interbank rate. From the third chart, you can see that return on capital for a property investor is actually very good. Based on the median rental and the much reduced property price of second quarter this year, the return on capital for a property investor is as high as 18 per cent. This of course is a function of the very low interest rates now, and the relatively strong rentals and low property prices. The question to ask is how far will the rental come down by, and when will interest rates start to climb. But for as long as things remain the way they are, then buying a property for investments makes sense.

Finally, let's look at the supply and demand situation. Between 2006 and 2009, about 4,200 units of non-land private properties were added to the market each year. But from 2011 till 2014, some 12,000 units are expected to come onstream in each of those years. The last time that much supply came to the market was in 2004, when just over 10,000 units were added to the stock. In that year and in 2005, the vacancy rate averaged 10 per cent. The excess supply was slowly absorbed and by 2007, the vacancy rate dropped to below 6 per cent.

Median rental in 2004 and 2005 also softened somewhat. But the more damaging effect was wreaked by the high interest rates then. So property owners practically made zero return on their capital in a few quarters in 2005 and 2006. Rentals went to paying bank interests.

Things gradually improved in 2006 and 2007. One of the reasons was the sharp increase of residents in this city state. Between 2005 and 2008, the number of residents in Singapore jumped by 574,000.

Unfortunately, the influx of residents is expected to moderate in the coming few years. The slowing global economy has also shrank the number of jobs available in Singapore. This coupled with the huge pipeline that's coming onstream in 2011 till 2014 does not bode well for the property market.

But the unknown now is how fast world economy will recovery from now onwards, and how soon the region will emerge from the shadows of the west. Then there is the question mark about Singapore becoming a global city with the opening of the two integrated resorts, and will it be able to attract the well-heeled here to stay and own second or even third properties. What about the Indonesians? Quietly, under the radar of many investors, the country has been making good and steady progress economically and politically. This year, it is expected to chalk up GDP growth of 5 per cent. Ditto next year. Will the Indonesians return to Singapore to splurge in a big way like the heydays of the 1990s?

No one can tell how the market will look like in the next three to four years. The best one can do is do a calculated bet, factoring in ample margin of safety.

As for Citigroup, its view is that the current buying frenzy is not the start of a cyclical upswing and that the sharp price hikes: 1) cannot be sustained without real wage growth, and 2) will prove unsustainable when the interest rate trend reverses.

'In July 2009, while new sales volume increased 40 per cent, resale volume was down 12 per cent,' it noted. 'We believe future price rises will be more moderated. If residential prices continue to escalate ahead of economic fundamentals, like they have in the past six months, we think there is a high possibility of further measures.' So tread with care.

# The writer is a CFA charterholder