When the Government introduced loan curbs via the Total Debt Servicing Ratio (TDSR) framework last June, the private housing market went into a tailspin. The repercussions — tepid sales and weak prices — were so severe, some market analysts took to describing the curbs as cooling measures.
Many tend to forget that the majority of private home buyers these days are investors first rather than owneroccupiers. Investors are less price sensitive in terms of affordability than in terms of exposure to risk. Investors stay out of the market as they perceive higher risk and not because they cannot afford the properties.
Once this risk is perceived to be low or to have fallen, it is likely they will return to the market. There is certainly no shortage of liquidity and interest rates have remained stubbornly low.
Do developers’ sales for May, which nearly doubled from those for the preceding month, signal that this has happened?
In total, developers sold 1,470 private homes last month, the highest since last June and a 96 per cent jump from 749 units sold in April. The volume also returns developers’ sales to the levels recorded before the TDSR.
A year ago, there was a strong feeling interest rates would not only rise, but also spike. The consensus was that this would send property prices spiralling downwards. This kept most investors away from the market unless a property was a compelling buy.
In a globally connected world, a year is a long time to stay in cash and out of the market. In fact, signs have been clear in the resale market: Although monthly resale transaction volumes have remained much lower than a year ago, the number of deals has been creeping up month on month.
The housing market has been inundated with so much bad news over the past year, including reports of large numbers of empty apartments in completed developments. Yet, those familiar with the ins and outs of the real estate market know these vacant apartments have been around for a long time. That the owners have been able to keep them vacant for so long is testimony to the fact that holding costs have not climbed appreciably.
A recent survey by Bloomberg News showed that most economists feel money market investors under-estimate the pace of tightening by the United States Federal Reserve over the next two years.
In its most recent policy meeting that ended on Wednesday, the US central bank officials predicted the federal funds rate, now between zero and 0.25 per cent, would rise to 1.125 per cent by the end of next year, up from the 1 per cent they had forecast in March.
They projected a more aggressive pace of hikes in the benchmark rate for the following year, that it would rise to 2.5 per cent at the end of 2016, versus the 2.25 per cent they had predicted in March.
Whether economists are right, local investors probably share the same feeling of those money market investors — that rates will probably rise only very gradually. This may explain why local investors have started to return to the market in bigger numbers.
Can we expect similar robust new home sales in the coming months? Why not? There are a number of attractive and well-located projects set to be launched and, if these are priced competitively, sales will follow.
Prices may remain weak for the present but, if sales return in a big way, who knows?
By Colin Tan – director of research and consultancy at Suntec Real Estate
Source : Today – 20 Jun 2014