Private homes puzzle: Why aren’t prices falling proportionately?

The growing vacancy rate in the private housing market is something property developers have been harping on for the past couple of years. At 8.9 per cent, official data shows the vacancy rate for private residential units at a 16-year-high, nearing levels seen in the aftermath of the 1997 Asian financial crisis.

Based on a March report by property firm Colliers, the number of mortagee sales – at 70 in the first quarter of this year – have reached levels registered during the 2008 global financial crisis.

But even as the indicators point to housing oversupply, property prices have remained firm. Just last week, Monetary Authority of Singapore managing director Ravi Menon said it was “too early” to lift property cooling measures, as prices have adjusted “only modestly” after a run-up that was stronger than that of income growth.

Why has rising housing supply not resulted in a proportionate fall in housing prices? Property analysts Channel NewsAsia spoke to said there are three main reasons.


The key difference between the current economic slowdown and the previous downturns is that we are not in a full-blown recession, analysts said.

“The current slowdown in the property market is mainly caused by government policies, not due to a recession,” said Mr Nicholas Mak, head of research and consultancy at SLP International, noting that with unemployment remaining low, and banks still extending loans, private home prices “have not fallen much”.

According to the Urban Redevelopment Authority’s private home prices index, prices have only fallen 9 per cent over three years since peaking in the third quarter of 2013. The magnitude of this decline is small, compared to the 62 per cent ramp-up of prices over a four-year period between 2009 and 2013.

Mr Colin Tan, director of research and consultancy at Suntec Real Estate Consultants, also pointed out that investors hold most of the unsold or vacant properties. “They are not so highly leveraged due to cooling measures. So overall, there is nothing yet to tip the balance,” he said.

“In many cases, especially for the high-end (properties), a deep cut is necessary to reach affordability levels of home owners. As conditions are not so dire now to warrant a deep cut, everyone is holding on to their positions as small cuts don’t really move sales,” he explained.

Mr Ong Teck Hui, National Director of research and consultancy at JLL Singapore, also observed that the current situation is less severe compared to the recession in 1997 to 1998, where there was “more widespread pressured selling by home owners and developers”.

“The unemployment rate in 1998 reached a high of 3.4 per cent from an average of 1.4 per cent in 1997, while today it is at 2.1 per cent, up slightly from the average of 1.9 per cent in 2015,” he added.

However, other market watchers like DBS economist Irvin Seah pointed out that the concept of a recession is a technical one. He noted that economic growth in the second quarter was largely supported by the biomedical cluster, and that some parts of the economy, like certain manufacturing sectors, have been in recession mode for quarters on end.

“To clear the private housing supply, prices have to fall, but for this to happen, interest rates have to go up,” said Mr Seah.


The unusually long period of ultra-low interest rates is a global phenomenon that has distorted financial markets, and drawn savers and investors to property assets. But it has affected a small and open economy like Singapore much more.

“This is why the Monetary Authority of Singapore implemented the TDSR (Total Debt Servicing Ratio) framework in 2013,” said Mr Ku Swee Yong, CEO of property firm Century 21 Singapore, referring to the Government’s move to curb excessive investment and leverage in non-productive assets like property.

Because Singapore uses the exchange rate to manage its monetary policy, it does not control its domestic interest rates. Instead, borrowing costs are mainly determined by US interest rates and investors’ outlook on the Singapore dollar.

Home loans rates, which are usually benchmarked against the three-month Singapore interbank offered rate (Sibor), are currently hovering as low as 1.2 per cent, as the US Federal Reserve holds off on rate hikes in a slowing global economy. This is compared to the situation in 1998, where the three-month Sibor reached nearly 8 per cent.

“The tipping point is global interest rates. When will the US and other global economies raise rates back to normal? If we can’t see this happening in the near future, expect more gradual price declines for many, many more quarters,” said Suntec Real Estate Consultants’ Mr Tan.

SLP’s Mr Mak also said that the prolonged period of low interest rates has contributed to a slow price decline, “as some owners are not pressured to sell their investment properties despite the low returns”.

“If the mortgage rates were higher, more property investors could be forced to sell and exit the market,” he said.

“There will come a point where the discussion is no longer about interest rates and investors’ holding power, but about the lack of rental income due to the vacancies,” said Century 21’s Mr Ku.

“This will hit people who buy (property) with cash to make mortgage repayments, but to a greater extent, people who buy with the expectation of using rental income to service those repayments.”


A third reason for the relatively small and gradual price decline is that peak oversupply of private homes is a situation that is still in the midst of unravelling, said Mr Ku.

According to URA data, about 20,000 private residential units will be completed and ready for occupation this year. This number tapers off in 2017 and beyond.

“The highest volume of private homes reaching the TOP (Temporary Occupation Permit) issuance stage happens this year. That’s when you receive your keys, that all your bank loans are drawn down, and you are suffering the maximum payout while holding a vacant unit. So we are standing on the precipice now,” he explained.

The present vacancy rate of 8.9 per cent translates to a stock of 30,310 vacant private residential units. SLP’s Mr Mak noted that this data-point lacks granularity, as it does not differentiate between unsold vacant units and units which are sold but yet to be occupied.

But Century 21’s Mr Ku said that the fact that the total stock of vacant private homes is at an all-time high – in the midst of a weakening global economy – is troubling in itself.

“This number (30,310 vacant units) is unprecedented. It will be exacerbated by the completion of properties in 2016 and 2017, the weaker employment situation, and the clampdown on foreigner inflow. My forecast is for vacancies to reach 45,000 units in 2018. Rentals will be very weak,” he said.

Mr Ku added it had been relatively easier to clear previous housing gluts in the 2000s, partly because Singapore’s population boomed as the country opened up to immigration and foreign investment, via tourism and financial services. “Today, we face limits in opening our markets any further.”

But others, like JLL’s Mr Ong, disagreed with the sombre assessment. “It does not mean that the market has to be cleared of supply for it to recover,” he said.

“At any time, there will always be supply on the market in terms of unsold stock. For example when the market turned around in mid-2009, there were more than 38,000 unsold uncompleted units while the figure as at mid-2016 is about 21,500.”

Source : Channel NewsAsia – 5 Aug 2016

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