By Mr. Propwise

From the URA’s recent flash estimate of the 1Q2012 private residential property price index, property prices have begun their long awaited decline. Prices were down 0.1% in the first quarter on a quarter-on-quarter basis.

But at the current levels the price index is still 16.1% above the previous 2Q2008 peak, and 13.6% above the previous all time high in 2Q1996.

Figure 1 – URA Property Price Index

This estimated decline of 0.1% comes after the rate of growth of the PPI had slowed for 9 consecutive quarters, i.e. property price growth had been decelerating continuously. This is likely due to concern over the slowing economy, worrying global economic situation especially with the troubles in Europe and weak growth in the US, combined with the dampening effect of multiple rounds of government measures.

Sharp or Gradual Decline?

Figure 2 – Change in Property Price Index

I had previously predicted that we would see a quarter-on-quarter decline in the 1Q2012 Property Price Index disclosure, and the URA’s flash estimate confirms that view. The flash estimates are put together based on the caveats lodged during the first ten weeks of the quarter, and the formal number will only be updated 4 weeks later, so there could still be some difference between the actual and flash numbers.

The uncertainty is whether we will see a sharp decline as during the 1997-1998 Asian Crisis and 2008-2009 Financial Crisis, or whether it will be a more gradual decline as we saw during the 2000-2004 Post-Dotcom Bubble and SARs era.

I did a study of the previous 3 property market corrections and found that the PPI corrected in the range of 19.9% to 44.9% and that the correction lasted from 4 to 15 quarters:

2Q1996 Peak to 4Q2008 Trough – 44.9% decline over 10 quarters

2Q2000 Peak to 1Q2004 Trough – 19.9% decline over 15 quarters

2Q2008 Peak to 2Q2009 Trough – 24.9% decline over 4 quarters

If history is anything to go by, what this means is that the correction could be longer and stronger than what most people are expecting. However, I believe that we will only see similar levels of price declines if there is an external crisis to cause a sense of panic, which we had in each of the previous 3 declines (e.g. Asian Crisis, Dotcom Bubble, Global Financial Crisis).

However some believe that the abundant global liquidity situation could blunt or even reverse the decline in Singapore property prices. Led by the European Central Bank and Fed, governments around the world have been easing monetary policy and keeping interest rates low to prevent another crisis triggered by too much debt.

Figure 3 – Straits Times Index

Even though the January rally in the Straits Times Index seems to have stalled at around 3,000 points, it is still up more than 10% since the end of last year. So if you believe that the stock market is a leading indicator for the property market, then we could see property prices supported in the coming quarters.

Possible 6th round of Government Measures Following Strong Developer Sales?

Sales of new residential homes by developers hit 5,200 units in 1Q2012, a very strong number and second only to the 5,578 units we saw in 3Q2009. Sales were buoyed by the launch of large numbers of compact units with affordable total costs in mainly mass market locations, and this can be seen in the top selling projects such as Watertown in Punggol, The Hillier in Hillview Avenue, and Prac Rosewood in Woodlands.

In fact, prices of non-landed private residential properties in the Outside Central Region actually increased by 1.2%, versus a fall of 0.9% in the Core Central Region and 0.7% in the Rest of Central Region. Prices in the Outside Central Region not only increased, but the increase was an acceleration compared to the 0.6% increase in the previous quarter.

The very strong volumes of developer sales combined with the acceleration of prices in the mainly mass market Outside Central Region increases the probability of the government putting in place a sixth round of property measures to further cool sentiment. This is especially so given that the harsh Additional Buyer’s Stamp Duty (ABSD) put in place in December 2011 seems to have not dampened sentiment that much.

It is not clear right now whether a potential sixth round of cooling measures would comprise merely of refinements to the current measures (e.g. increase ABSD?) or be something brand new. Either way, all property market constituents should brace themselves for this possibility.

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