Interest rate uncertainty hits private housing

It must be a developer’s worst nightmare to flip open the newspapers and read the bold headlines screaming that new home sales have plunged to their lowest level in five years: That was exactly what happened last week.

Data from the Urban Redevelopment Authority showed developers sold a paltry 259 new homes last month, down more than 90 per cent from the record high in last March of 2,793 units.

Despite this, do not expect developers to start slashing prices anytime soon, because the same set of URA data showed that only 118 units were launched in the same month. If you want to be perversely optimistic about it, you could say developers sold 2.2 times the number of launched units — another record?

Developers held back launches not because sentiment is very bad, but rather they have not been confident enough to hit the sales targets at the prices they hope to achieve. Developers know there are many potential buyers out there, but these buyers want lower prices to compensate for the prevailing uncertainty and the added risk they are taking.

Buying interest has not waned the least bit. If buyers have left the market, it is more likely that home prices have risen beyond their means.

All the curbs introduced so far via the Total Debt Servicing Ratio framework have inconvenienced many a genuine buyer looking to purchase a home to live in. However, it is just that — an inconvenience.

It is different for speculators and investors. The cooling measures have not stopped this group from buying when they perceive that there is a bargain to be had — November new home sales of 1,271 units proved this.

There are now heightened expectations that property prices will fall. No investor will buy today if he can get the same unit cheaper tomorrow. Yet, many investors cannot say by how much and by when prices will drop.

What about upgrader demand? Almost all of this demand has migrated to Executive Condominiums (ECs), with the rest largely remaining pent-up.

And so, despite recent rule changes to the EC market, including a 30 per cent Mortgage Servicing Ratio cap and the imposition of the HDB resale levy, an EC site in Jurong West attracted 12 bids with a bullish top bid of S$381.81 per sq foot per plot ratio. This is because the market is backed by strong upgrader demand, with most EC projects having sold out.

Investor demand is fickle. It can come strong and fast, but it can also disappear overnight. Demand based on needs is more stable and is dependent on affordability. Developers recognise this and are willing to put in high bids for EC sites because they pose less risk compared to private housing sites.

What then can we expect for the private housing market?

The uncertainty over the United States Federal Reserve’s tapering of its stimulus programme has been partially resolved. While US stock markets have rallied, those in Asia are largely subdued. The stock markets in Asia are still coming to grips with the potential impact of the tapering on the region.

The real estate markets in the region mirror this behaviour. Investor buyers remain unconvinced that interest rates will remain low, with borrowing costs already edging higher, but I believe this is driven largely by expectations.

The latest US job report showed a sharp drop in the unemployment rate, but this was only because more people left the job market. This has reduced the labour force participation rate in the world’s largest economy.

Long-term unemployment remains high, with close to 74 million Americans out of a job for more than two years. This shows that the US labour market is facing structural problems as opposed to cyclical ones.

If incoming Fed Chair Janet Yellen reads it this way, there may be no acceleration in the tapering process. In fact, it could be put off indefinitely until economic reforms are implemented to resolve the structural problems.

If there is no further tapering, can we expect interest rate rises? The liquidity will remain with us, but this does not mean the risks are lower. They remain high. I think an eventual interest rate hike may come suddenly via an external event other than US tapering — possibly another black swan. This is why we need to remain vigilant: It will come when we least expect it.

ABOUT THE AUTHOR: Colin Tan is Director of Research and Consultancy at Suntec Real Estate Consultants

Source : Today – 24 Jan 2014

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