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Private housing market more akin to 2009 than 2003

It has not been a pretty start this year for the housing market, with last month’s data showing deteriorating indicators in both the private- and public-housing segments. Sporadic positive market responses to projects launched thus far, such as the Riverbank@Fernvale and Rivertree Residences, garnered positive responses and provided some relief.

It has not been a pretty start this year for the housing market, with last month’s data showing deteriorating indicators in both the private- and public-housing segments. Sporadic positive market responses to projects launched thus far, such as the Riverbank@Fernvale and Rivertree Residences, garnered positive responses and provided some relief.

However, such good response is not the norm as many other projects are struggling to meet the pace achieved in the past few years.

Two weeks earlier, the Government eased the Total Debt Servicing Ratio framework to exclude those seeking refinancing for owner-occupied properties, providing a slight boost to sentiment.

However, Finance Minister and Deputy Prime Minister Tharman Shanmugaratnam quickly put paid to market speculation that more measures could be eased in the short term, saying last Friday that it was too early for such a move.

The weakening market conditions have led to prominent property developers turning bearish and even DBS Chief Executive Piyush Gupta to forecast a 10 to 15 per cent decline in private housing prices this year.

As more market participants add to the chorus of voices talking down the private housing market, the questions most pertinent to stakeholders are whether the decline will be even bigger and if it will be prolonged.

To give an alternative view, we take an assessment of the relationships between the key drivers of private housing demand and the private Residential Property Price Index (RPPI). The purpose of the exercise is to show how the performance of these drivers helped to shape the prices in the private residential property market, which could then be used to determine how this segment would fare in the coming years.

This framework will serve as a basis for a more structured discussion on the property market than one relying on momentum indicators such as monthly home sales and quarterly price movements.

The first four drivers are what we would call wealth creation and destruction factors, namely, the pace of economic growth, the net change in foreign population, the change in stock market prices (measured by the Straits Times Index) and the credit environment (measured by the three-month SIBOR, or the Singapore Interbank Offered Rate).

Next come the direct drivers of demand for private housing, namely, the direction of Government policy, the strength of the Housing and Development Board resale market, the strength of the private housing rental market (measured by the average occupancy rate and the change in the Urban Redevelopment Authority’s Private Residential Property Rental Index).

The graph depicts the rise and fall of the RPPI compared with the number of drivers that turn negative for private housing demand each year.

From the graph, it can be seen that from 1995, as an increasing number of demand drivers turned negative, the pace of increase in the RPPI started to slow. As the number of negative factors hit the peak in 1997 and 1998, the RPPI suffered its sharpest decline in years. In 1999, as the number of negative factors receded, the RPPI rebounded sharply.

After 1999, the market reversed as the combined impact of the bursting of the dotcom bubble, the 9/11 attacks in the United States and the global health crisis due to SARS resulted in many of the drivers of demand for housing turning negative. As a consequence, the RPPI declined for four years in a row, starting from 2000.

After 2003, the market started to recover with the improvement in the demand drivers resulting in a recovery in the RPPI. Even after world markets were hit by the 2008 global financial crisis, private housing prices here managed to rebound very quickly as the number of demand drivers improved rapidly in 2009.

We came to the conclusion that no one single factor, by itself, can cause a prolonged fall in property prices. We propose the theory that a combination of negative factors are necessary to create an ecosystem of negative sentiment that will dampen demand for private housing, much like what happened in the 2000-2003 period.

Conversely, in 2008-2009, when these drivers quickly turned positive, private property prices recovered rapidly.

So, the big question is: Will the downward correction be more like the one in the 2000-2003 period or the one in the 2008-2009 period? In our opinion, the cumulative weakening of the drivers in the coming years could spark off a short-term decline, but the conditions are more akin to those in the 2008-2009 period.

This is primarily due to the rapid build-up in wealth in Asia and the continued expectation of growth in the region. In addition, the significant improvement of the infrastructure of Singapore has enhanced its attractiveness as a location of choice for people and businesses.

Numerous rich and famous personalities, such as Facebook co-founder Eduardo Saverin, A-list actor Jet Li and billionaire investor Jim Rogers have decided to call Singapore home. These provide a good basis for economic growth, job creation and demand for housing.

Taken together, we believe that the number of drivers that could negatively affect demand for housing also have the capacity to rebound quickly, suggesting that price corrections could be more reflective of the conditions post-2008.

 

ABOUT THE AUTHOR: Tan Kok Keong is Chief Executive of REMS Advisors, a Singapore-based firm that provides research-driven investment advice, collaborative investment strategies and mortgage advisory services.

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