By Paul Ho (Guest Contributor)

The numerous property cooling regulations imposed by the MND, URA, MAS and IRAS have done much to curb the speculative fever in the property market, but regulations to stop the latent demand are futile. In short, if there are 20,000 people needing houses and only 10,000 houses, then prices will surely go up. Brute force measures to artificially restrict 10,000 people from changing their minds to stop buying or defer buying will only momentarily solve the problem.

A brief background to Singapore’s housing woes

It’s not clear if the Singapore government is sincere in wanting to solve these problems given the way government land sales are structured, where the chief valuer lets the bid price meet an undisclosed minimum before releasing the land out for tender.

By the time the prices of land parcels rise to meet the minimum bid price the Singapore government wants, the pressure of demand outstripping supply has already been built up. And given that houses need two to three years to build, during this phase, the land prices will continue to shoot up. We believe that this is also the reason behind Mr. Ku Swee Yong’s observation of a unique Singaporean phenomenon – that when land supply is released, prices shoot up. Why? Because when land is released, developers are already starved of land, and will bid aggressively for the land. Developers would also know that this supply is released on the back of demand outstripping supply. Why else would they bid so high?

Here is a chart of the sequence of events that is behind a run up in property prices:

Figure 1: Sequence of events behind a run up in property prices

So if the government really wants to cool the market or solve the issue of property prices running out of control, they would do well to solve the inherent problems in the system. Many people have already suggested the remedies for fixing wild property price swings, but I doubt anything has been adopted thus far.

The following are seven trends I see shaping the Singapore property market in 2014 and beyond.

Trend #1 – Pockets of extra HDB supply from PRs will be an overhang on the market

Since January 2013 Permanent Residents have not been allowed to rent out their units after the expiry of their current lease. This means that by January 2014 or 2015 many of these Permanent Residents will be looking to sell their HDBs if they continue to be away from Singapore. This creates a small pocket of extra supply of HDB flats that will be an overhang on the market.

Permanent Residents who are away from Singapore and cannot secure permission to rent out their HDB flats have no economic benefit from keeping these units and will be keen to sell their HDB units. We have come across several Permanent Residents who have left Singapore to work overseas and decided to sell their HDB due to being unable to obtain a license to rent out their HDB flats.

Trend #2 – It may be more difficult to get financing for an HDB or EC than a condo

The imposition of the Mortgage Servicing Ratio (MSR) of 30% or less for Executive Condominiums (EC), combined with the income ceiling of $12,000, means that the maximum price of an Executive Condominium is about $880,000 (assuming an 80% loan). Buying an EC or HDB will be tough as many will fail the MSR criteria. A couple would have an easier time to borrow a larger quantum for Condominiums than for an HDB flat or an EC.

Many property buyers have chosen to buy private residential homes instead of ECs or HDB flats due to financing difficulties. And since they could not afford a large quantum, they ended up buying very tiny private apartments or condos.

Trend #3 – Artificially depressed HDB demand and prices may bounce back from 2016

HDB prices will be artificially depressed due to the MSR of 30% or less, at least for the short term. But at the same time, the government has deliberately slowed down the supply of HDB flats. This may lead to a buildup of demand pressure for HDB flats in a few years’ time.

Currently, new PRs are barred from buying HDB resale flats for three years after obtaining their PR. By 2016, these new PRs (numbering in the tens of thousands) would be eligible to buy HDB, causing a demand and supply imbalance. As HDB is the base benchmark for property prices, if HDB prices rise, every property class will likely follow. Thus HDB prices may bounce back from 2016, after the elections.

Trend #4 – The private residential vacancy rate will increase

Figure 2: URA Q4 2013 stock, vacancy and supply in the pipeline

For private property, there are 18,003 vacant units representing a vacancy rate of 6.2% in the 4th Quarter of 2013. This is considered a low rate versus historical comparisons. If you take a look at the Property Price Index (PPI) from 2002 to 2005, the vacancy rate at which property price is more or less at equilibrium (i.e. neither increasing nor dropping) is about 7.5% to 8%. Hence prices for private properties are still holding up fairly well even though we hear anecdotal evidence of softening ahead of the actual supply coming on-stream.

The supply in the pipeline is 83,702 units, versus an annual demand of about 11 to 15 thousand units, thus representing roughly 5 to 7 years of supply that will be coming on-stream in the next 5 years. While this might seem like a lot, there is some room for more supply to come in before the vacancy rate reaches 7.5% to 8%.

Trend #5 – A larger share of household incomes will be going into property purchases and loan repayment servicing

The artificial channeling of buyers into private residential dwellings may increase the long term sales trend line, even though the average household income has been falling. In other words, more and more people are buying private residential housing despite having weaker incomes. And it is not because they really want the luxurious lifestyles or “high life” as the government is prone to highlight, but because they could not wait for the HDBs anymore having been repeatedly rejected by the BTO balloting process, or were not able to obtain a loan due to the MSR.

Hence developers are building ever smaller private residential units for this substantial group of people, while charging ever higher per square foot (PSF) prices.

Trend #6 – Developers will be under pressure, but prices may not crash

There is pressure on developers to launch uncompleted units for sale to ease their financing costs. Highly leveraged or weaker developers may be more hard pressed to launch and garner sales faster. As many developers rush to launch, these uncompleted units come into the market (as uncompleted “supply”), giving rise to the impression that the market is softening dramatically or even “crashing” with so many units for sale.

The stronger developers will have holding power and not act rashly. Once the weaker developers’ stock is absorbed, prices will firm up again. HDB shortages will set the baseline prices and all the other classes of properties will have upward pricing pressure. It’s basically a scarcity game.

Trend #7 – The Core Central Region is becoming more attractive

The Core Central Region (CCR) has become very attractively priced relative to the Outside of Central Region (OCR). This is an anomaly which is not justified. There is currently no change so material that makes Punggol or Sengkang more attractive than Orchard Road.

Historically prime regions in the CCR always command a premium relative to the other two regions. The OCR overshooting the CCR may indicate that many people are buying into the hype and are overpaying for these properties (on a per square foot basis).

Figure 3: Property Price Index – Q3 2013 – Non-landed Private Residential Property

If property buyers start to look at the prime areas, they may realize that these areas are not too expensive after all. The CCR will have more good pickings for long term rental income, capital downside protection as well as capital gain potential. But the relatively low per square foot prices could reflect poor total quantum affordability as many of the units there are bigger in size and hence could cost between $3 million to $10 million.

Many of the buyers of OCR properties could be sitting on stagnant prices for years to come. If there is no recession or further regulatory actions, we expect property prices to soften about 10% based on the current trend.

By Paul Ho, holder of an MBA from a reputable university and editor of, Singapore’s first Cloud-based Home Loan reporting platform used by Property agents, financial advisors as well as Mortgage brokers.

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