Supply numbers do not tell the whole story

The startling headline this week on the front page of a newspaper pointed to more than 100,000 private housing units in the pipeline as at the end of the third quarter, a record high since data was collected more than a decade ago.

The number included private housing supply of 83,975 units, 9,824 Executive Condominiums and an estimated 10,070 units that will be developed from sites sold or slated for sale. In addition, some 27,000 public housing flats will be sold this year – another record.

In the true spirit of Halloween, these numbers may scare some investors and others planning to buy new homes to pause for reflection.

However, the numbers – presumably screaming of a huge overhang of supply that will lead to a significant price correction in the near future – are not new and not as straightforward as they seem.

Warnings of record pipeline supply have been sounded many times before. Moreover, a significant portion, or 56 per cent, of the future private housing supply has already been sold. Nevertheless, more than 36,000 units have remained unsold, still a historical high.

But, as noted by one reader, supply is not true supply if it is not put up for sale. So at any point in time, the numbers offered for sale in the market may not be very big or at least not big enough to put downward pressure on prices.

Developers have some discretion to time their project launches to coincide with periods of optimism in the market. Not only do they sell more during the good times, they sell them more quickly, partly because of the herd instinct.

Public housing flats are mainly for own accommodation, so really there is no issue of oversupply here. However, they do take away potential buyers from the private housing market – from the lower-priced segment at least.

Those most in need of this warning are the investors, especially short-term ones. For long-term investors, their motivation is wealth preservation. Most are realistic not to expect much or any capital appreciation in the next few years. Some are even willing to tolerate small paper losses because they believe they will eventually earn a profit if they hold their properties long enough.

However, for new investors, such losses can hurt just as much as actual losses.

The leasing market for housing is still pretty resilient, but can it withstand the onslaught of the huge impending supply?

When the authorities said last year they were clamping down hard on the number of foreigners in Singapore, many including myself felt that housing rents will come under huge downward pressure since foreigners formed the bulk of renters.

We waited patiently but housing rentals did not correct. Instead, they continued to inch upwards. Recently released population figures provided clarity to this puzzle: The number of foreigners has continued to grow.

The severe clampdown was actually in the form of drastically reducing the rate of growth of foreigner inflow. But slower growth does not mean fewer foreigners in the country. That is one puzzle solved.

However, it still comes as a surprise that rents are rising even as ever larger numbers of units have been completed over the past year and a half.

Vacancy rate levels have largely held steady for the previous quarters before rising slightly in the third quarter. But for sure, the absolute number of vacant apartments has been increasing steadily, not just for the third quarter but for the earlier quarters as well.

Normally, rising rents and rising vacancy levels do not go together, but in abnormal times such as the present, it happens.

Rock-bottom holding costs due to the low interest rate environment have allowed more owners to keep their apartments vacant for that much longer. This has been critical in sustaining the high rents in the face of the increasing number of vacant units. So far, landlords as a group have been more united and successful in keeping rents high than renters have been able to negotiate lower rates.

But the dynamics behind the housing rental market is a lot more complex these days – propped up by growing numbers of local renters and the still growing number of en bloc beneficiaries. Even at this late stage of the property cycle, we do get requests from some management committees to submit a proposal for a collective sale.

Even as one support to the rental market weakens, another rises to take its place. It is really difficult to predict how rents will trend in the near future.

So, Halloween or not, the huge supply numbers as a scare tactic have lost much of their fright value these days.

Colin Tan is Head of Research and Consultancy at Chesterton Suntec International.

Source : Today – 2 Nov 2012

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