By Mr. Propwise

In an interesting and contrarian report, Dr. Chua Yang Liang of Jones Lang Lasalle argues that the surge in upcoming supply will not cause property prices to fall. In this article I will sum up his arguments and add some of my own thoughts.

Recently several property analysts have been arguing that a correction in the Singapore residential market is in the pipeline in 2014/2015 due to the large stock of housing completions during that period (~50,000 public + private unit per year), which is 2.5 times the average completed since 2001.

Dr. Chua believes that residential property prices will not fall despite this large increase in supply for the following three reasons:

1. The Singapore residential market has not corrected based on supply alone in the last decade

Dr. Chua calculates two metrics he terms as the short-term and long-term balance of housing stock. The short-term balance compares his estimated household demand formation (e.g. from marriages and immigration) with the housing completions based on URA and HDB data. The long-term balance is the cumulative sum of the short-term balance over time.

He argues that if you compare this short and long term balance of housing stock with the URA Property Price Index (PPI), you will find that the PPI is mainly sentiment and not supply-driven. For example, the two major corrections in the PPI since 1998 were in 2000-2001 and 2007-2008, which happened due to external shocks and despite the housing balances indicating a stock shortage.

2. Immigration is likely to continue and support the demand for upcoming new supply

Dr. Chua believes that the recently mentioned population target of 5.5 million by 2050 is too low, as it suggests a growth rate of just 0.2% per year over the next 40 years, which will be insufficient to support economic growth.

He thinks in the low case we should use the 6.5 million target by 2050 (which was used by URA in the 2000 Concept Plan), and in the high case we could hit 5.5 million by 2015 (which would involve keeping the resident population growth rate at the same pace as 2010 while slightly lowering the foreign population growth rate).

This continued growth in population will thus create new demand for the upcoming supply.

3. “Residual demand” backlog is likely to keep prices stable

The population has increased from 4.02 million people in 2000 to 5.1 million in 2010, a 2.4% annual compounded increase (with the non-resident population growing at 5.6% compounded). But the total housing stock (private and public) has only grown from 956,275 to 1,158,885, or a 1.9% annual compounded increase.

The net effect is that the size of the average national household (Dr. Chua uses total population divided by total housing stock excluding worker and student dormitory housing, which is different from the Census definition) has increased from 4.21 people in 2000 to 4.37 people in 2010.

Dr. Chua believes that there has in effect been a “backlog” of demand created by the inability of supply to catch up with rising demand over the past decade, and thus the upcoming supply (together with immigration) will merely result in a relieving of this backlog and a balancing of long term supply and demand, with the average household size falling back to its long term average of 4.08 with a population of 5.5 million by 2015.

The large upcoming supply will thus not crash the market but instead help to correct the longer term shortage of housing, and Dr. Chua forecasts that the PPI will still record an average growth of 1.8% till 2015 (based on a population growth target of 6.5 million by 2050). If the population increases to 5.5 million by 2015, Dr. Chua forecasts a continuing deficit in housing stock, thus pushing up prices by 7.5% per year.

Dr. Chua’s bottomline is that no matter what the immigration levels are, we will not see a dip in the PPI (barring an external shock). He also recommends that policymakers continue to release land to support a supply of 16,000 to 24,000 housing units per year.

My thoughts on Dr. Chua’s arguments

I think Dr. Chua’s “residual demand” argument is interesting and introduces the notion of a long term demand backlog caused by the inability of supply to catch up with our population growth over the last decade (mainly driven by immigration).

I’m not sure, however, about his forecast of a steadily rising PPI.

First, while the upcoming supply may serve to balance out the demand backlog in the long term, I think that in the short term there can still be a serious case of indigestion by a large amount of supply coming onto the market over a short time period.

Second, Dr. Chua takes the current price levels as fair and then forecasts the matching of supply and demand going forward. Could the current price levels already reflect a severe supply shortage situation, and correct to “fairer” levels when the new supply comes online? Markets are made at the margin, and prices are determined when marginal demand meets marginal supply.

Thirdly, there could also be different outcomes for different segments of the market. For example, the rental market for shoebox units is predicated on the continuing inflow of professional immigrants, which will be affected if this does not happen.

Fourthly, as Dr. Chua points out himself, in the short term the PPI is largely driven by sentiment and not by movements in supply. We could potentially see external shocks coming from a Developed world recession, European crisis etc., which would impact Singapore’s open economy negatively. At the same time, many international investors are also starting to see Singapore and the Singapore Dollar in particular as a “safe haven”. This could lead to foreigners continuing to support the high end market, as we’ve seen in Hong Kong with the influx of Chinese buyers.

With so much uncertainty in the markets, I believe investors should adopt a cautious attitude, but be on the lookout for opportunities – as we saw during the last Global Financial Crisis, the window for buying low can come and go quickly!


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