A bubble at the very top? Don’t let averages fool you; High-end properties may be shooting up too fast

Just buy homes, sell them and get rich. That was the mantra of the 1990s before the music died.

As property launches again see brisk sales and overnight queues make a comeback, some wonder if those days are back.

So far, these voices of caution are merely a murmur. Analysts can point to the strong economic growth underpinning the recent interest in property as well as numbers that show that 2006 is not the early ’90s.

On the face of it, they have a strong case.

Back then, price gains were a lot higher – averaging about 30 per cent per annum between 1993 and 1995. This time, private home prices turned the corner around the second quarter of 2004, rising by an average 12 per cent in just over two years.

While this is a decent gain, it doesn’t seem large enough to warrant fears of a bubble in the general property market.

Another difference is that housing loans then were growing rapidly by more than 20 per cent per annum.

Today, housing loans are growing at a subdued single-digit pace, which seems to indicate that there isn’t excessive borrowing taking place to fund speculative activities.

But the picture changes if you zoom in only on the high-end segment – where the strong gains posted may not be sustainable.

A recent report by property consultancy Savills showed that average prices of such residential units have risen by 34 per cent since the first quarter of last year.

These are strong double-digit price gains over a fairly short span of time, which makes them susceptible to a correction – especially if the global economy experiences a sharper-than-expected slowdown.

Is it speculative demand or genuine buying that is driving activity and prices in the high-end segment?

So far, speculation doesn’t appear as rampant as in the early 1990s, with market estimates placing sub-sale activity – which usually involves speculators buying from a developer and selling the property to someone else – at only 5 per cent of total sales in the first half of this year.

Then again, speculative activity could gain momentum if queues continue to build up at property launches, prices continue to escalate, and the media plays up these developments.

Mr Colin Tan, head of research at property consultancy Chesterton International, said the problem arises when “expectations feed upon themselves and the buying becomes a frenzy”.

Singaporeans still account for the bulk of purchases, but unlike the early 1990s, industry players say there appears to be a greater presence of foreign buyers this time.

Some appear to be cash-rich, thanks partly to the region’s recent economic prosperity which has given rise to a pool of new rich. The boom in the Middle East due to higher oil prices has also resulted in wealthy individuals looking for units here.

An executive who handles conveyancing at a law firm said it had “a lot more foreign clients” than in the early 1990s, with many even paying in cash.

“So they are less likely to be fleet-footed,” said the executive.

Singapore’s property market looks relatively more attractive than others in the region. In the United Kingdom, Australia and New Zealand, foreign buyers have not only benefited from substantial price gains, but many have also enjoyed currency gains due to the strong British pound, Australian dollar and the New Zealand dollar.

It makes sense for these buyers to reduce their holdings in markets that have outperformed and re-allocate some of their funds to one like Singapore, which has lagged behind despite a solid economy and a stable government.

Despite the feel good factors, there are still concerns that the euphoria in the high-end segment may not be sustainable, once fresh supply comes on-stream. The spate of en bloc sales is one such source.

Developers have been spending huge sums to bid aggressively for state and private land in prime areas, and when these are developed, the supply of high-end properties will rise.

Savills estimates that about 5,500 units from en bloc sales will be removed from the market from 2006 to 2008, and redevelopment of the vacant sites completed from 2009 onwards.

Nevertheless, Savills foresees the peak price of super high-end properties could exceed $4,000 per square feet by 2010 – compared with the current record high of $3,000 psf achieved at the prime St. Regis Residences.

However, Chesterton’s Mr Tan has a note of caution for those looking to buy high-end properties. It’s a gamble, he says, because the market is anticipating a record number of visitors and foreign talent coming to work here in view of the two integrated resorts. “Hence, the logic follows that there will be demand. How much, nobody really knows. We are moving in uncharted territory,” says Mr Tan.

Knight Frank research director Nicholas Mak also highlighted a potential stock market downturn and possible changes in government policy as risk factors that could dampen demand. Remember the anti-speculative measures of 1996?

To be fair, there are no indications yet that the Government will tighten its policy. But if the prices of high-end properties continue to escalate and if speculative activities rise sharply, it may have little choice. Buyers also cannot take the outlook for the global economy over the next two years for granted, given the uncertain prospects for the US economy.

So tread carefully. Those who fall from the high-end have a long way down to travel.  

Source: TODAY, 27 November 2006 

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