In a post titled “My Worries” on his blog “Housing Matters”, Minister Khaw Boon Wan expressed his concerns about the current euphoric state of the housing market, and cautioned that “sharp property price increases cannot go on forever.” In this article we’ll take a look at the reasons for his cautious outlook on the market and consider if it makes sense for us to be worried as well.
Reason #1 – The large supply of units under construction and in the pipeline
“35,000 private units (condos and landed properties) have already been sold, though still in construction, with payments in various stages of completion. But there are 45,000 units in the pipeline, waiting to be built and sold.”
Minister Khaw and many property analysts are concerned about the large upcoming supply. DTZ estimates a completion of 32,359 units in 2013-2014 versus the 17,501 units in 2011-2012. If we combine that with weak demand from say, poor economic growth or higher interest rates, that could be a recipe for disaster.
We know that the upcoming supply is large, but whether prices will fall depends on a key variable that is hard to predict: demand. Credit Suisse thinks that if immigration growth remains at above 70,000 per annum the oversupply can be absorbed by the market without a significant fall in prices. However, immigration policy has become politicized post the recent May election, so it remains to be seen if the government will continue to pursue its pro-immigration policy at the same rate as before.
Reason #2 – The government plans to boost supply even further
On June 9 2011 the Ministry of National Development announced the 2nd Half 2011 Government Land Sales (GLS) program – an estimated total of 8,115 housing units are on the Confirmed List and 6,080 on the Reserve List, for a potential additional supply of more than 14,000 units. Even if the sites on the Reserve List are not triggered by developer bids, as Minister Khaw says: “Together with committed investments, some 53,000 units will be looking for buyers over the next couple of years or so. That is not a trivial number.”
Not to mention that due to widespread anxiety in the public from sharp property price increases, the Government is also planning to increase the number of units and speed of construction of HDB flats, which will become a headwind to the mass market private property segment.
Reason #3 – The volatile global situation could impact Singapore
Minister Khaw mentioned the following external situations that worry him:
– The European sovereign debt overhang which will take time to resolve
– The Middle East crisis which could lead to an oil price hike and slowing economic growth
Off the top of my head I can think of at least two more “black swans” that could cause markets to plunge:
– The end of QE2 (Quantitative Easing Program) in the US in end June and current impasse on the debt ceiling
– Nuclear and tsunami fallout situation in Japan which could cause hiccups in the global supply chain
In the most recent quarter foreign buyers made up 16% of all buyers of private property. Many property investors in Singapore are also looking to rent out their property to foreigners, as the locals usually prefer to buy if they can afford it. In the event of one or more of the above situations deteriorating into a full blow crisis, foreign demand for purchase and rental can disappear suddenly.
But for now the fundamental causes of the rise in the property markets all around Asia – low interest rates and ample liquidity – are still present. Rising inflation makes matters worse as people worry about the falling value of their bank deposits due to negative interest rates, and are desperate to deploy their cash in any asset that they believe will be a hedge against inflation.
Some analysts expect interest rates to start rising towards the end of 2011. Together with falling rental yields as rising prices are not matched by rising rents, this could result in a tenuous situation for overleveraged investors.
So should we be worried?
So if the Minister is worried about the Singapore property market, should we be too? I think we should be more cautious in our property investment decisions for all the reasons mentioned above, and I’ll add one more to the list: policy risk.
If Minister Khaw is worried about sharply rising prices, it increases the risk of additional anti-speculation measures coming out, or of the Government boosting supply beyond what the market can absorb. Already last week we’ve seen the Hong Kong Government raising the minimum downpayment requirements for housing.
Property is not only a cyclical sector, but due to its nature there are significant time lags from when a policy is implemented to when we see the effects. These time lags amplify the ups and downs of the cycle as the increased supply that is being built today could get completed at a time when demand has fallen off. It is not easy for anyone to forecast three or four years into the future.
This is not to say that prices WILL go down – demand for Singapore property could unexpectedly increase as well, but my advice to all budding property investors would be to do your sums carefully and not overstretch yourself. The time for greed is fading, and the time for fear is ascending.