Soft landing not quite good enough for buyers

The multiple rounds of cooling measures and loan curbs implemented since 2009, particularly the Total Debt Servicing Ratio in June 2013, have resulted in a soft landing in private residential property prices.

Data from the Urban Redevelopment Authority showed private residential property prices dipped by an average of 1.3 per cent in the third quarter from the previous three months, widening from the 0.9 per cent fall in the second quarter.

The decline also marked the eighth straight quarterly drop from the fourth quarter of 2013, during which time prices fell a cumulative 8 per cent in a slow-motion grind.

In contrast, private residential property prices plummeted a total of 24.9 per cent over four quarters from the third quarter of 2008 to the second quarter of 2009 during the global financial crisis. They plunged 20 per cent from the third quarter of 2000 to the first quarter of 2004 amid the dotcom collapse, the 9/11 attacks and SARS. Several years earlier, prices nosedived 44.9 per cent from the third quarter of 1996 to the fourth quarter of 1998, after the introduction of the May 1996 property cooling measures that were followed by the Asian financial crisis.

The current soft landing in the residential property market appears to be in the best interests of various stakeholders. Existing owners do not suffer a great loss in their asset values and developers are able to attain decent profits despite having to slightly reduce prices. Meanwhile, housing affordability for buyers has improved.

Yet one thing is clear despite the price decline in the last two years: Homebuyers continue to remain on the sidelines, biding their time as they wait for value buys in a gradually softening market, unlike situations in the past when prices dropped sharply in short periods to draw them back.

For instance, in the first quarter of 2009, private residential property prices fell by a sharp 14.1 per cent, and then slipped another 4.7 per cent in the second quarter. That opened up the opportunity for buyers to snap up homes, and prices rebounded quickly from the second half of 2009, despite a shaky world economy still clawing out from the global financial crisis.

Deep price cuts within a quarter or two will undermine the profitability of projects, but opportunistic buying will usually emerge and lift overall sentiment. It may be easier for developers and sellers to quickly close the negative chapters and move on, instead of suffering the slow grind with few deals done. Buyers who see deep price cuts will tend to feel they might miss the boat versus the almost-certain prospect of gradual and small price drops in a soft-landing situation. There is no hurry to buy a property if a gradual price decline is almost a certainty.

The profile of buyers currently looking to upgrade to private property, i.e. HDB flat owners eyeing suburban condominiums, is quite different from those who snapped up mass-market condos from 2010 to 2013. These likely more savvy buyers did not jump on the bandwagon during those heady years and continue to prefer to wait for value buys at very attractive prices. Buyers who snapped up private condos in 2010-2013 were, in contrast, more aspiration-driven. They also had the mindset that, since interest rates were low then, investing in property would be the best option despite the high prices.

Buyers looking to purchase a private property in these past two years also include HDB flat owners who have satisfied the Minimum Occupation Period (MOP) of their flat, i.e. they have lived in their unit for at least five years. As the quality of Build-to-Order HDB flats has improved over the years, the difference in standards between public and private housing has narrowed considerably. Flat owners who just cleared their MOP are therefore in no hurry to purchase a private condo, since their HDB flat has good build quality. Only when a major opportunity arises will they be motivated to purchase a condo.

Meanwhile, the roughly 1 percentage point average price fall in every quarter over the last two years may not have been sufficient for opportunistic buying to emerge. Such buyers will usually snap up properties when they sense the market has plunged by about 10 per cent overall, or at least 5 per cent in a quarter.

However, none of the past eight quarters from the fourth quarter of 2013 to the third quarter of this year have seen an average price fall of such magnitude. Some buyers who have been sidelined may also have dropped out of the wait when large price cuts did not materialise, deciding to invest in areas other than property.

Some other reasons for the limited price cuts of private residential projects in the past two years include developers having diversified their portfolios and risk-return strategies. The limited opportunities of developing properties in Singapore have forced some of them to break ground overseas and develop or invest in properties in the region.

The private residential project they are holding on to in Singapore has become a smaller part of the overall development portfolio, making price reductions sticky. In addition, they had paid high prices for acquiring the land for the Singapore residential project.

A soft landing in prices has been firmly established over the past two years, but it may not necessarily have put demand and expectations for residential properties on a solid footing. The common view is that the soft landing in prices will persist, in that every quarter ahead will continue to see a roughly 1-odd percentage dip in private home prices.

Given the large number of unlaunched and unsold residential stock, we cannot assume that the coming quarters will not see a blow-out in property prices. If it happens, however, it will likely be short-lived, as opportunistic buying will quickly set in — and prices can possibly recover fast enough following a major drop in prices in a quarter or two.

ABOUT THE AUTHOR: Ong Kah Seng is a director at R’ST Research, a real estate research firm in Singapore covering all property sectors, including residential, retail, office, industrial, investment, leisure and hospitality.