By Mr. Propwise

From the URA’s recent flash estimate of the 3Q2012 Private Residential Property Price Index (PPI), property prices have managed to defy gravity and even managed to register a slight increase in the quarter. The 3Q2012 URA PPI flash estimate hit 208 and was up 0.6% on a quarter-on-quarter basis.

At the current levels the price index is 17.2% above the previous 2Q2008 peak, and 14.7% above the previous all time high in 2Q1996.

Figure 1 – URA Property Price Index (based on 3Q2012 flash estimate)

This estimated increase of 0.6% comes after last quarter’s 0.4% quarter-on-quarter increase, implying the pace of price growth is accelerating after the 0.1% fall in 1Q2011. It appears that the strength of property demand and boost to sentiment from the U.S. Federal Reserve’s QE3 have outweighed concern over the slowing economy, the worrying global economic situation especially with the troubles in Europe and weak growth in the US, and the dampening effect of multiple rounds of government measures.

The rate of price growth differed across the various market segments. In the Core Central Region, prices of non-landed private residential properties increased by 0.2% versus an increase of 0.6% in the previous quarter. Prices increased by 0.7% in the Rest of Central Region (versus a 0.4% increase in the previous quarter), and increased by 1.0% in the Outside Central Region, an acceleration fro the 0.5% increase in the previous quarter.

Do note that the URA’s flash estimates are compiled based on transaction prices given in caveats lodged during the first ten weeks of the quarter. The actual second quarter statistics will be updated four weeks later, and past data have shown that the difference could be significant, especially when the change is small.

Will property prices go up or down?

Figure 2 – Change in Property Price Index (based on 3Q2012 flash estimate)

At the beginning of the year, most analysts were expecting a fall in prices, and were divided on whether we would see a sharp decline as during the 1997-1998 Asian Crisis and 2008-2009 Financial Crisis, or whether it would be a more gradual decline as we saw during the 2000-2004 Post-Dotcom Bubble and SARs era. Funnily, year-to-date, the URA PPI is actually UP 0.9%, an unexpected outcome versus the initial predictions of a 5% to 15% decline in prices predicted by most analysts.

I believe that we will only see significant levels of price declines if there is an external crisis to cause a sense of panic, which we had in each of the previous three declines (e.g. Asian Crisis, Dotcom Bubble, Global Financial Crisis). This is because the abundant global liquidity situation could support 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 (till Sep 30, 2012)

Since reaching a low of 2,738 points in May, the Straits Times Index (STI) has recovered to 3,060 points as of end September, and is up 6% versus the last quarter. If you believe that the stock market is a leading indicator for the property market, then we could see continued support for property prices in the coming quarters.

More Property Cooling Measures?

The sales volume of new residential homes by developers fell by 26% versus the previous month in August, while the secondary market rose by 14%. This suggests that the prices of new homes are likely under some pressure, but even if the prices of new launches correct, the strengthening prices of resale units could take up the slack.

This continued resilience of property prices despite the previous five rounds of government measures increases the probability of 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.

Will property prices keep going up? I believe that they cannot continue to defy gravity forever, and that investors looking to buy property in this market should continue to be cautious.

By Mr. Propwise, author of Timing the Property Market.

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