Home prices to ‘dance until the music stops’

OCBC today said in a new report yesterday that mass-market homes in Singapore are looking expensive, while high-end properties, which are yet to hit their previous peak prices, could be even riskier bets because of their reliance on fickle overseas buyers.

“The market may choose to ‘dance until the music stops’, but in our opinion, it is time to recognise the risks of direct investments in residential property,” wrote Ms Meenal Kumar, an analyst at OCBC Investment Research.

Ms Kumar expects the Government to introduce more measures to cool the property market at a time when many buyers are getting lured by cheap debt. Some of the possible steps may include asking banks to cut the loan-to-value ratios or to demand higher upfront payments from customers for new mortgages, she says.

“The biggest risk to the property market today is policy risk,” Ms Kumar writes.

Affordability of dwellings is a key issue with policy-makers.

According to OCBC’s analysis, in the first nine months of this year, a family here earning the median household income spent 35 per cent of what it made on servicing a floating rate mortgage that covers 80 per cent of the property’s value and charges half a percentage point more than the Singapore Interbank Offered Rate (Sibor).

Last year, a mortgage taken on similar terms on the same 900 sq ft, non-landed apartment outside the central region would have cost the family less than 31 per cent of its income.

“Buyers seem to have readjusted the ‘bands’ of what constitutes a ‘responsible’ housing purchase,” Ms Kumar says. “Buyers could be at risk if housing loan costs go up, and a previously responsible loan and leverage level is no longer so sensible.”

According to OCBC, the investment case for “shoebox” homes will get tested as a sizeable supply of these small apartments hits the market in the next two years. “It remains to be seen if ‘shoebox’ units can achieve the kind of rental yields that justify their high price per sq ft,” says Ms Kumar.

Developers that are betting on high-end property prices to scale their previous peaks “could be in for a profitable but volatile and more uncertain 2011,” the OCBC report notes.

OCBC’s top pick among Singapore property stocks is UOL Group, whose portfolio of commercial and hospitality properties would prove to be helpful, should prospects for residential real estate weaken next year, the researcher says.

Overall, OCBC Investment Research has a “neutral” rating on Singapore’s residential property developers.

Source : Today – 9 Dec 2010

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