Housing glut or not, worries remain

The expected surge in the supply of new Housing and Development Board (HDB) flats and private homes over the next few years will not lead to a housing glut in 2013/ 2014, according to a recent Citigroup property report that made news for its contrarian view.

Citigroup’s analysis looks at Singapore’s housing stock in totality, taking into account both private and public housing, saying they are closely linked. It says a prolonged period of under-building in the 2000s has resulted in the current severe housing shortage. This is likely to provide continued support for mass market prices and demand.

The team behind the report estimates that the deficit in housing units is in excess of 50,000 currently and this undersupply will likely take several years to clear, just like the oversupply situation in the early 2000s.

I do not totally disagree with their view. If you examine the facts, there was definitely serious under-building, especially in the public housing sector, the repercussions of which we are feeling now. What you may dispute is the extent of the under-building.

I am not sure if the team realises it but it was describing all the ingredients coming together for the perfect bull run that we are experiencing now, as opposed to the perfect storm that some are predicting that the market will face in two to three years’ time.

The decade of under-building has led to a strong build-up of pent-up demand. Throw in a loose immigration policy, the strong stimulus provided by the integrated resorts and other infrastructure projects leading to a spectacular 14.5-per-cent gross domestic product growth rate last year, abnormally low interest rates and a liberal foreign ownership policy with respect to property and you have the perfect bull run.

The run-up has been sufficiently strong to fully negate the effects of four rounds of property market cooling measures. It has yet to be tamed as the market is still running on many legs – one of which is the low-interest-rate environment, which will likely persist in the near future.

However, even if one holds the view that there will be no property glut in 2013/2014, it does not mean that our worries are over. We cannot preclude that one can quickly build up later.

It is already evident that there are imbalances in the different housing segments even if there is an overall equilibrium – oversupply in the upper tiers and a shortage in the lower tiers.

In a rapidly rising market where prices rise faster than household incomes, the imbalances will worsen. If prices do not correct soon to re-align the mismatch, more supply may need to be announced to correct the severe shortage in the lower tiers. This can quickly build up into a glut even if one does not exist now.

If you subscribe to the view that there will be equilibrium by 2013/ 2014, what it means is that there is a limit to the price downside when the market corrects. Prices will fall until they reach the support level that matches all units with occupiers. In other words, we will have a sharp correction but no crash. But if you feel that there will be a glut between now and 2013, a price correction can be severe as there will simply be more housing units than occupiers.

Finally, the profile of buyers in the HDB resale market for May showed that private property owners (8 per cent) and permanent residents (20 per cent) still make up a sizeable chunk. Last year, then National Development Minister Mah Bow Tan revealed – before the implementation of the new rules – that 10 per cent of buyers in the resale HDB market were private property owners, while PRs made up 20 per cent.

The latest numbers seem to suggest that the new rules have been ineffective. On the contrary, I feel the measures have worked. What we are seeing are probably single-property private owners who are downgrading, owing to en-bloc sales or otherwise.

The indications from agents are that resale volumes have fallen drastically in May. So 8 per cent and 20 per cent on a sharply reduced volume is much smaller in absolute numbers. In fact, most private property owners and PRs who bought in May probably had little choice, unlike citizens who have the option to buy new Build-To-Order flats.

By Colin Tan – head, research and consultancy, at Chesterton Suntec International.

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