Jan 17, 2010

Is private housing rally sustainable?

There's still housing demand but heavy reliance on investor buyers poses risks

By Colin Tan

In July last year, a buying wave of tsunami proportions drove developers' sales for the month to an astounding 2,772 units.

To put that into context, the number was huge even for a quarter, let alone a single month. It is easily more than three times the monthly average sales of 700 to 900 units over the past decade.

If robust sales for the previous five months - averaging over 1,400 units per month - had not made policymakers sit up, this result certainly caught everyone's attention.

Was it pent-up demand? Quite a few thought so. Speculative? The Government thought so. It announced measures in September to 'temper the exuberance in the market and pre-empt any speculative bubble from forming'.

Developers were dismayed, thinking the measures were a death knell for the fragile market. Actually, the impact was more psychological than real, because the measures were aimed at pure speculative plays, not investors.

Have the measures worked? It is hard to tell. Sales in the following months fell, but they would have come down anyway, with or without the measures. July's figures were simply too high.

Many predicted even fewer sales with the approaching year-end holiday period. But November's figures showed a solid 600 units sold. Considering it was a 'slow' month, sales were good as they were achieved despite rising prices.

The actual price rise in the fourth quarter of last year will probably be more than the 7.3per cent estimate last month. Certainly, this is not a market which has seen better days.

Will buying continue? There is no reason why not. Investors are buying, not speculators, so the cooling measures have little impact.

Chinese investors in particular are leading the charge. Many have taken profit in China's real estate boom, and their funds are now moving into Hong Kong and spilling over to Singapore.

So what might happen this year? Unless there are alternative channels for this massive liquidity, the buying will likely continue until the authorities are forced to step in to limit the risks arising from the banking sector's increased exposure to the property sector.

As I see it, there are two possible scenarios for this year: continued healthy growth, or a sharp correction.

Demand still genuine

There is genuine pent-up demand for homes as there has been a rapid increase in the number of households over the past two years. Many are buying now instead of renting, with the majority buying for their own occupation.

While incomes have not risen as rapidly as prices, most buyers are sitting on accumulated wealth. In the case of new permanent residents, many have made huge capital gains on properties in their home countries.

The opening of the integrated resorts will bring in more employees. Even if these are not of managerial level, they will stoke the Housing Board resale market, which in turn supports the private housing market as HDB upgraders cross over.

The economy's exposure to property will be moderate as most buyers are not borrowing up to the 80per cent allowed, as they are using their accumulated wealth to lower their loan-to-price ratio.

Importantly, the economy is growing again. So will incomes, even if both are expected to see slow growth. The widening gap between home prices and economic fundamentals will narrow eventually.

Money from China and elsewhere is flowing in in search of long-term investments. Even if they are not living here now, most investors intend to make Singapore their home in the not-too-distant future. Many are not likely to pull out their funds at the drop of a hat.

Investing in property is a hedge against inflation. Where stock prices may go down, property will hold its value. Investing in property is a sure thing if you hold it long enough.

Over-reliance on investors?

But part of the capital inflow that is driving up property sales and prices is hot money seeking high yields. If returns are better elsewhere, it could leave quickly.

Liquidity also feeds on confidence. When that is lost, funds move out, such as in Dubai.

At current price levels, most genuine owner-occupiers have been crowded out. This explains the sudden popularity in HDB resale flats and the sharp rise in resale prices.

Many of those still buying homes are investors. Developers recognise this and are focused on the investor buyer: apartment sizes have shrunk to as little as 300 to 400 sq ft to raise affordability and some sales previews are limited to buyers interested in multiple units.

If investors form the bulk of buyers, who will occupy the completed units? Private rentals are not moving up just yet. Traditionally, owner-occupiers form the bedrock of property purchasers. When that balance is heavily distorted, you can expect serious repercussions.

Also, property prices move in cycles. Gone are the days when prices moved up in a straight line. Buying at the peak means waiting a full cycle before prices come up again. In the meantime, will rentals cover investors' loan repayments?

The stimulus packages rolled out by governments worldwide helped save the financial system from collapse. However, this situation is unsustainable and the stimulus will need to be rolled back eventually, leading to rising interest rates.

With rates so low now, any big increases could translate to a doubling or even tripling of mortgage payments.

Even if Singapore manages its asset inflation situation prudently, a domino effect is still possible if overseas property bubbles burst.

To sum up, the health of the market depends on the number of investors versus those buying for their own use. But even if there are many more investors, it still does not guarantee that the market will correct immediately, although cracks will eventually surface.

The writer is director and head of research and consultancy at Chesterton Suntec International.