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Residential property prices supported by QE, low interest rates, shrinking supply, says RHB

The Editor
The Editor • 7 min read
Residential property prices supported by QE, low interest rates, shrinking supply, says RHB
The Singapore residential property market is probably a lot more resilient during Cov-id-19 than it was either during the Asian Financial Crisis (AFC), SARS or the Global Financial Crisis (GFC). Despite the “circuit breaker” measu
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SINGAPORE (June 12): The Singapore residential property market is probably a lot more resilient during Covid-19 than it was either during the Asian Financial Crisis (AFC), SARS or the Global Financial Crisis (GFC). Despite the “circuit breaker” measures, some developers have been moving units through digital viewings of showflats.

In a recent briefing, analyst Vijay Natarajan of RHB Securities said the Singapore residential market to be well cushioned and expects a price correction rather than a collapse. “We expect property prices to fall by 5–10%. We see developers lowering prices, giving ‘soft’ discounts but no fire sales,” says Natarajan, adding that he expects transactions to fall by 30–40% because of Covid.

At any rate, prices of Singapore residential property are not high. Credit Suisse, in an update on June 5, pointed out that Singapore is at the bottom of its residential property clock (see chart 1). “Beyond the next 12 months, we expect Vietnam and Singapore to lead the recovery on strong underlying demand and supportive policies, Malaysia to find its bottom after seven years of contraction, and downside risks to Thailand and Philippines,” says Credit Suisse. One of the triggers for this support, according to Credit Suisse, is pent-up demand. Mobility data suggests a progressive recovery in activity levels could result in pent-up demand post-lockdowns.

While Singapore is reopening economic and social activity in phases after the circuit breaker and Malaysia is emerging from its movement control order gradually, China is already ahead of the curve. Hence, for signs of a real recovery in the economy — and not just equity movements supported by concerted simultaneous global quantitative easing — all eyes remain focused on China.

According to the China Real Estate Index System, better known as CREIS, the sentiment in the physical housing market continues to look good. In the first week of June, sales volume in major 33 cities increased 14% y-o-y. Partly, lower mortgage rates for end-user demand, and demand from first-time homeowners drove sales.

Unlimited QE, ample liquidity

Home loans in Singapore are usually priced off the three-month Singapore interbank offered rate (Sibor) plus a spread, or unusually, the three-month swap offer rate (SOR) plus a spread. Sibor is at its lowest level in 18 years. This is a result of un-limited Quantitative Easing (QE) announced by the US Federal Reserve to offset a dramatic slowdown in the US. Hence, mortgage rates are very low and in some cases, the lowest they have been.

Meantime, the Monetary Authority of Singapore (MAS) announced that total foreign currency non-bank deposits in Singapore’s banking system stood at $781 billion at the end of April this year, up 20% y-o-y. “The strong growth in foreign currency deposits in Singapore this year has come from a variety of sources — domestic, regional, and beyond the region. There are some well-known global drivers of this deposit growth amid the current Covid-19 related economic slump, including central bank actions that increase liquidity in the financial system, banks and corporate treasuries raising their liquidity profiles, and a higher level of precautionary savings by households. Other financial centres have also seen significant deposit growth,” said MAS in a press release on June 7.

When liquidity is ample and funding is cheap, investors would inevitably look for assets that give better yields. In general, property assets, including residential property, pro-vide higher yields than money markets, especially when the assets are structured well. Yes, equity markets have recovered with this wall of money, but they are a lot more volatile than physical property.

Supply has fallen

Based on URA figures, supply of units and vacancy rates have fallen (see chart 2). And the number of unsold units has also fallen. “The supply situation has been easing. Unsold units were close to 40,000 in 2019 and are now at 31,000. Although there are still units in the pipeline [that haven’t been launched] most of the units from the spate of en-bloc projects have been launched,” says Natarajan. Vacancy rates have been falling — albeit at a glacial pace — from 9% in 2017 to 5.4% as at 1Q2020. In the first quarter, vacancy rates outside the central region or OCR were at 4.1% compared to 7.4% in the core central region or CCR and 6.2% in the rest of the central region, better known as RCR. CCR comprises districts 9, 10 and 11.

Developers have two ways to get land in Singapore, through en-bloc sales and government land sales (GLS), which is calibrated. If property prices plunged — and this is negative not just for developers but for banks as well — the government could reduce supply, through the GLS programme.

Another factor that provides comfort, according to Natarajan, is that buyers are local. “A lot of buying is driven by local demand. This includes Singaporeans and PRs who comprise more than 90% of buyers, and foreign buyers who form 6–7%,” he says.

Foreign buying was probably curtailed by punitive additional buying stamp duties (ABSD). ABSD can be as high as 20% of the price of the property, for foreigners which are not nationals and permanent residents of Iceland, Liechtenstein, Norway or Switzerland, and nationals of the United States of America.

“When crises hit, foreigners are in a hurry to sell, but local buyers tend to analyse and wait for the right time, and that limits fire sales in the market,” says Natarajan.

Households in better shape

Household balance sheets are in a healthier state than in 2011, when the property measures started (see chart 3). Growth in household debt has been steadily declining, and household debt has been flat since 2017. On the other hand, liquid assets such as cash and deposits have been growing steadily.

Natarajan attributes this partly to the en-bloc cycle. “Household debt has reduced in the last 2 years because of en-bloc wealth which de-levered balance sheets.” Additionally, loan-to-value ratios have also fall-en, to 49% in 3Q2019, down from almost 54% in 2017. This limits distressed sales, Natarajan adds.

Globally too, the Singapore residential market is in a better position compared to other global cities. An indicator by UBS Wealth Management, the UBS Global Real Estate Bubble Index, is designed to track the risk of property price bubbles in global cities.

In its most recent study, as at Sept 2019, residential property prices in Singapore along with Boston, Milan and Dubai are in the fair value range compared to 24 global cities. Only Chicago was undervalued. Asia-Pacific cities such as Tokyo and Sydney are overvalued, and Hong Kong is in bubble territory. According to UBS, typical signs include a decoupling of prices from local incomes and rents, and imbalances in the real economy, such as excessive lending and construction activity.

“Singapore’s housing market has been remarkably stable over the last few years. Regulatory tightening has proved effective and curbed excessive price growth. Real prices are basically on the same level as in 2012, such that the city remains in fair-valued territory,” UBS says.

Government has levers

Other than interest rates, homebuyers need to be in jobs. Employment is a driver of homeownership. Since Covid-19, the Singapore government has announced four budgets, injecting some $93 billion to fight Covid-19 with a focus on jobs. The main support areas have been the job support scheme to keep people in work, livelihoods, households, SMEs and the future economy.

Prior to 2020, the government had imposed some 10–11 property measures to regulate prices. Last month, the government said it is giving developers a six-month extension for the remission of developers’ ABSD, because of the impact on construction and completion schedules. “Before AFC and GFC, the government had not imposed so many measures to regulate property prices, and there is enough room for the government to support the market if it sees a property price collapse,” Natarajan observes.

However, prices are more than likely to fall. The government has articulated that it would like to see property prices move in line with economic fundamentals. Hence, if the economy is set to contract, with GDP growth falling by 4% to 7%, then property prices correcting by 4% to 7% should not come as a surprise. Based on this, Natarajan expects residential property prices to move in line with economic contraction and decline in tandem.

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