By Mr. Propwise

Total residential sales fell by an estimated 21% month-on-month in June, with new home sales falling by 19% (excluding Executive Condominiums) to 1,371 units while secondary market sales fell by 29% to 1,010 units. This is the third month of contraction for total residential sales and the second month for new home sales (excluding ECs).

A clear trend of falling volumes and decreasing liquidity in the housing market is forming, likely caused by a pullback in housing demand, as investor appetite for property is satiated both by the large number of launches in the recent months and also as worries about sluggish economic growth start to dominate.

Tougher times for developers ahead?

Only three projects generated sales of over 100 units in June, compared to four in May and six in April. The top three projects were River Isles in Punggol (263 units sold in June, median price $835 PSF), Sea Esta in Pasir Ris (255 units sold, $906 PSF), and Watercolours in Pasir Ris (201 units sold, $735 PSF).

And while the Monthly Sell-Through Rate (excluding ECs), defined as the units sold in the month divided by the units launched in the month, shot up from May’s 69% to 105% in June, this was due to a 47% drop in the number of units launched (i.e. the denominator shrunk significantly).

Developer inventory, while falling 1.1% in June to 7,234 units, is close to a five year high. If sales continue to fall significantly, developers could be stuck with a lot of unsold units, which would put pressure on either the prices of new home sales (if developers decide to cut prices to get rid of unsold units) or their balance sheets (if they decide to hold on to the unsold units and wait for better times).

Sad state of the secondary market

Things are even worse in the resale market, which saw an estimated 29% month-on-month drop in transaction volumes. The secondary market as a percentage of total sales fell from 41% in May to 37% in June, significantly below the five year average level of 57%.

What this means is that homeowners looking to sell their property will likely find it increasingly difficult, despite their asking prices typically being significantly below the prices of new homes sold in the neighboring areas. Property has always been an illiquid investment – the drying up of transaction volumes makes it more risky.

Weaker market reduces policy risk

One of the few bright spots in the market is that the risk of further dampening policy measures from the government has been reduced. A statement by the Ministry of National Development on the Additional Buyer’s Stamp Duty suggests that the government is satisfied that the market is “moving towards a stable and sustainable path”, given that the proportion of foreigners and companies buying private residential property had fallen from 20% in 2011 to 7%, and that private home prices had only risen 0.3% in the first half of 2012 compared to a 6% increase in 2011.

As long as prices and volumes do not spike up (the URA’s flash estimate of the 2012Q2 Private Property Index increasing 0.4% after falling 0.1% in 2012Q1 is a risk factor if the trend reversal sustains), the government is unlikely to put further brakes on the market. However, this is likely to be of little comfort to both developers and investors in a market where volumes are declining quickly.

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