Investors to return as Fed tapers

Now that the United States Federal Reserve has announced its long-awaited tapering of its stimulus, the 800-pound gorilla is removed and investors will likely re-enter the housing market here.

Singapore’s private residential market has been lethargic for the past six months after the US central bank in May flagged its intention to unwind its extraordinary stimulus efforts. Investors who have been largely behind the robust private home sales for the previous two years had retreated to the sidelines, awaiting clarity over the interest rate situation should tapering begin.

However, the announcement by the US central bank on Wednesday was not quite what most investors had expected: It plans to scale back its US$85 billion (S$107.5 billion) a month bond-buying programme by US$10 billion a month beginning in January, suggesting it is still not confident enough about the economy despite citing stronger job growth.

The Fed also said its benchmark rate would likely stay low “well past the time when the unemployment rate declines below 6.5 per cent, especially if the projected inflation continues to run below” its 2 per cent target.

One US analyst described the scale-back as a very small amount — more symbolic than substantive. In a sense, economists from DBS Bank have been proven partially correct in their 2014 outlook.

DBS Chief Economist David Carbon had said “too many at the Fed really, really, really want to taper”. He said that because of this, for whatever reason, the Fed would go ahead and taper anyway — which they have now done.

How will this affect the market here? On the housing loans front, commercial banks that have been preparing for this day now know how much more cover they need. This is assuming that most investors need to take loans, but some certainly do not. In any case, investors being investors, most prefer using other people’s money to their own when taking such risks.

I am not sure if US interest rates will rise with the tapering, but if they do, the increase will probably be marginal. If nothing happens in the US, nothing significant will happen to the cost of funds in Singapore. In Singapore, if banks have over-provided — which they usually do under pressure from the Monetary Authority of Singapore — they will probably relax some of their strict preconditions for lending.

As such, I suspect investor buyers may re-enter the market, especially if the low-interest-rate environment persists. The robust buying is likely to start with the new project launches, which may then lift the rest of the market upwards — the resale as well as the high-end market that has been widely forecasted to weaken further next year.

Aside from external factors, the next significant event for the housing market here next year is the new property tax rule on vacant homes: As these homes no longer qualify for rebates, the holding costs for investors will increase.

Will this then persuade investors to be more aggressive in seeking to lease out their units? Will the additional supply of rental homes be enough to cause rentals to decline in a significant way, especially with more newly completed homes coming on the market? There will always be pockets of market weakness as new projects nearby are completed.

Without accurate data on new expatriate households, the housing rental market is difficult to predict. For investors out there, it will be a challenging 2014: Hope for the best, but prepare for the worst.

By Colin Tan – Director of Research & Consultancy at Suntec Real Estate Consultants

Source : Today – 20 Dec 2013

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