Singapore residential property: Is this the tipping point?

For the last three years, the trend in Singapore’s residential property market has been virtually one-directional: Up.

Despite the Government’s repeated efforts to cool the market, home prices have remained resilient and recently hit new highs. It is not hard to see why.

Population growth has been on an uptrend, there has been a housing shortage for years, and borrowing rates are currently low.

I have mentioned these three forces separately in previous editions of this column, but they bear repeating because two of them are forming a confluence that is about to change the market’s status quo.

In my view, the days of steadily increasing residential property prices are numbered, and I expect the private housing market to correct moderately over the next 12 months.

The first and perhaps most fundamental change is the decline in Singapore’s population growth due to tighter immigration policy. The Government has scrapped its scheme that allows foreign investors to fast-track their permanent residency applications, raised foreign-worker levies and lowered the maximum ratio of foreign workers in companies’ total workforce.

These policies are unlikely to be reversed in the near term. On top of these, the Government may introduce further cooling measures as it deems necessary.

National Development Minister Khaw Boon Wan has said he is especially monitoring the market for shoebox residential units, or those with gross floor area of less than 600 square feet. These shoeboxes are popular because bigger units have become less affordable for ordinary Singaporeans.

The second change is in the works. The market’s decade-old shortage of 90,000 units, based on my estimates, is now being addressed, thanks to active project launches by the Housing Development Board and record Government land sales over the last one to two years.

From 2012 to 2015, my estimate is that a total of 140,000 to 150,000 residential units will be completed, enough to fully compensate, by 2014 or 2015, for my estimated shortfall.

The third price force – low interest rates – is unlikely to change soon. Given that the United States is likely to raise its policy interest rate in the third quarter of next year at the earliest, low mortgage rates are likely to persist for at least the next 12 months.

In addition, the Monetary Authority of Singapore’s current policy in favour of a strong Singapore dollar could continue to attract fund inflows into the country and help keep local interest rates subdued.

Low rates, tight housing supply even as new homes are being built in the next few years and developers’ pricing power given their good balance sheets lead me to believe that the upcoming residential price decline in the next 12 months will be moderate.

You may ask: Can we really call this a tipping point for the market? Admittedly, that will depend on how long the change I predict in the market would last. But considering that the change in the two price forces I discussed above is fundamental in nature, I believe that, at least, the one-directional price movement we have seen so far will not be sustainable.

Furthermore, some sociologists may agree that it is in the best interest of the Government to continue to try to keep a lid on property prices.

The popularity of shoebox units is probably likely to lead to households making decisions to have fewer or no children, which would run counter to the Government’s programme to encourage larger families.

This is one demographic tipping point worth watching.

By Tan Chin Keong – an analyst at UBS CIO Wealth Management Research

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