Potential housing oversupply?

Without a doubt but that alone is not going to stop buyer demand

Since the announcement last month of another bumper crop of land for new residential projects for the first half of next year, there has been a pick-up in the number of comments from the real estate industry raising concerns about a potential oversupply of residential housing.

Most developers, though, do not appear to be too concerned as they are convinced that the demand will still be there. I am inclined to agree with them.

On offer under the Confirmed List for the first-half of next year are 17 residential sites with potential for 8,100 private and executive condominium units.

This is close to the record 8,135 units offered under Confirmed List sites in the second half of this year.

Including Reserve List sites, the 1H2011 Government Land Sales Programme will have a total of 30 sites that can generate a record 14,300 residential units – even higher than the record 13,900 residential units offered for 2H2010.

According to official figures, the total potential supply of private housing units – including confirmed sites for 1H2011 – that can be completed within the next few years will be about 80,200 units.

This figure is only for the private housing market. What about the much higher-than-normal supply in the public housing market compared to only a few years ago? The two markets are still interlinked, despite the significant differences.

Whichever way you try to justify it, the supply looks to be simply too much. I drew attention to this problem as far back as a year ago and, since then, it is has been a topic oft-written about by others.

Having said that, it is not as if the majority of purchasers – many of whom are investors – are ignorant of the potential oversupply.

I am very sure they are either buyers certain of fundamentals catching up or they are supremely confident high-stakes gamblers.

If you are one such buyer and do not see yourself in either camp, you had better ask yourself why you have made a purchase.

If some market experts still cannot understand this continued buying, I doubt they really know what is driving the market.

Recently, I was pressed by a veteran property investor of more than 20 years to describe the situation unfolding before us.

Here’s what I said to him: The present situation is like an underwater earthquake setting off a giant tsunami. Thousands of kilometres away, it is coming and almost all of us know about it as it is well-publicised.

What we are unsure about is when and how hard it will hit us. Do we seek refuge now or is there enough time to enjoy ourselves a bit more? And how far up the slopes and hills do we need to go to escape the approaching waves?

In the meantime, a lot can happen. Fortunes can be made and opportunities lost.

Nowadays, it is a lot harder to predict when the tsunami will hit the shores as it is close to impossible to read what governments will do.

It is no use making statements such as “the low-interest rate environment is unsustainable for long periods of time”.

Collectively, governments have proven that they can let rates stay low for far longer than we could have imagined only 12-18 months ago.

Those raising the spectre of oversupply can do better to steer the market away from the damaging effects of a glut by urging more action on the demand side of the housing equation.

Do they really expect the authorities to heed their advice and reduce supply? The most recent set of demand-side cooling measures in August raised the heckles of many would-be investors and buyers and generated many complaints to the press.

By managing the ample liquidity from the supply side, the authorities can say: “It is your call.”

Nevertheless, the authorities should be mindful of the groups where the burden of an oversupply falls heaviest on.

Developers and financiers? Yes, on some of them anyway.

Investors? Yes, the impact of oversupply will hit most of them.

Owner occupiers? They should be unaffected – if they have been prudent in their purchases.

But all of us know that buying a home is almost always an emotional process. It has always been: “This is going to be my first and last property”, and so there is no reason not to splurge on it.

By Colin Tan, Head, Research & Consultancy at Chesterton Suntec International.

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