Price rebound for landed homes may exceed other residential types

LIKE their non-landed counterparts, since the third quarter of 2013, or the immediate term after the implementation of the Total Debt Servicing Ratio (TDSR) regime, the landed property market has seen declining prices and transaction volumes.

We will analyse this market by looking at some statistics for the period from the first quarter of 2013 to August 2016. From this analysis, we come to realise that there are some common features between the landed property market and its non-landed counterpart, that seem to go against intuition.

Also, there are some features in the landed property segment of the residential market that may provide us with slivers of information on how the market may behave in the medium to long term and also when to time a purchase.

For a start, let us look at transaction volumes of the various sub-segments of the landed and non-landed residential market. Chart 1 shows that the two segments track each other closely.

In other words, from the period just prior to the advent of the TDSR to date, the pattern depicting new sale, sub-sale and resale transaction volumes for both landed and non-landed residential properties are very closely mirrored.

Prima facie, one may dismiss this behaviour as nothing extraordinary, but in fact when you think deeper, it does reveal something that requires explanation.

This is because over this period, for the non-landed property segment, new sales made up the majority of transactions, while for landed property, it was resales and sub-sales (Chart 2).

However, as was highlighted in the chart, the pattern that transaction volumes took for both landed and non-landed properties tracked each other closely. This is unusual because if developer sales have propped up transaction volume in the non-landed segment, this would have left the landed segment without much support from new sales.

Based on this logic, transaction volumes for landed properties should fall more than for non-landed properties. But for the period of analysis, this does not seem to be the case.

Without going further to filter out the various effects that may have contributed to this behaviour, my opinion is that activity in the landed property segment is either more robust than the developer sales which supported the non-landed segment, or it had been catalysed by sales in the non-landed segment. The latter is more likely.

Price wise, the performance of the landed segment is more accentuated than that of its non-landed counterpart. From Q3 2013 to August 2016, island-wide non-landed prices fell just 4.6 per cent. The prices of terrace homes fell 6.7 per cent; those for semi-detached units fell 16.2 per cent; and prices for detached houses went down 17.4 per cent.

This reinforces the point that landed properties tend to react more to market-changing forces than non-landed residential properties. In fact, from the start of 1990 to the end of 2014, the beta for landed properties is above one when compared to the URA Private Residential Property Price Index (PPI).

A beta of greater than one means that prices rise or fall more than a unit change in the URA PPI. What this means is that when the market outlook is not sanguine, landed property prices would fall more than non-landed ones.

However, on the upturn, it means that they also outperform their non-landed cousins and in the long run, landed properties also perform better.

For those who intend to buy landed properties for long-term stay or investment, this is an important finding because if this historical relationship is maintained, then those who own landed properties are likely to see their value expand faster.

For those who believe in timing their entry, the relative weakness in prices for landed properties against non-landed ones creates an opportune moment for entry.

As the prices of landed properties have softened by not an insignificant amount relative to their non-landed counterparts, if the historical behaviour is repeated in the future, the return on the rebound will be much higher than for other types of residential properties.

When measured in terms of price quantum, landed properties saw even greater changes for the period Q3 2013 to August 2016, exceeding the price falls in terms of dollar per square foot and on a land area basis. The fact that prices fell more in quantum value could mean that the average size of the land transacted has been shrinking.

One possible reason is that newer landed properties tend to have smaller land sizes and these properties could have been the entry points for the nouveau riche who may be more vulnerable to an economic downturn than old money families.

If we assume that this hypothesis is true, therein lies the risk of buying such properties: a person who could just qualify to buy under the TDSR rules may also have a lower ability to hold onto such properties.

Of course another possibility is that there is a group of people living in smaller landed properties who are getting on in age and need to monetise their asset, regardless of the market situation.

These two groups would be selling into weakness and given their urgency to do so, would suppress prices more.

The landed property market has its own dynamics but these factors can only be teased out with further research. Nevertheless, one can still come to some understanding of this market with a few simple statistics and feedback gathered from agents.

One thing that is important and often missed by buyers is that landed property has outperformed the non-landed segment of the residential market.

This means that if historical trends continue, it is financially rewarding to enter this asset class. The downside is that it can also hurt if one’s fortunes are affected by any downturn that coincides with the residential real estate price cycle.

Therefore buying a landed property is good only if one has the wherewithal to ride through the vicissitudes of life. With the TDSR in place, part of that downside risk is mitigated. However, buyers will still need to conduct personal stress tests by running what-if scenarios. One such test could be, how long could he/she hold out continuing to pay mortgages if a job is lost.

For those who can both afford to buy and maintain their regular mortgage payments, the market is now at the stage that offers that opportunity. With the cacophony homing in on arguments about whether the cooling measures will be relaxed, many have been distracted from their focus of making a decision to buy residential properties.

Today, the residential property market is very likely to have already progressed into a new cycle. If one accepts that view, then general prices of landed properties is at the trough.

Given the higher beta of landed properties, for those wishing to trade, the trough to peak returns will be exceptional and even for those holding for the long term, it will also provide superior returns compared to buying at the mid-cycle.

By Alan Cheong – Savills Singapore research head

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