By Mr. Propwise

From the URA’s recent flash estimate of the 2Q2012 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 2Q2012 URA PPI hit 206.8 and was up 0.4% on a quarter-on-quarter basis.

At the current levels the price index is 16.5% above the previous 2Q2008 peak, and 14.0% above the previous all time high in 2Q1996.

This estimated increase of 0.4% comes after the rate of growth of the PPI had slowed for nine consecutive quarters (i.e. property price growth had been decelerating continuously), followed by a slight decline in 1Q2011.
Figure 1 – URA Property Price Index

It appears that the strength of property demand has 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 0.6% versus a decrease of 0.6% in the previous quarter. Prices were flat in the Rest of Central Region, while they increased by 0.4% in the Outside Central Region, a slowdown from the 1.1% 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.
 
Sharp Decline, Gradual Decline, or Recovery?
Figure 2 – Change in Property Price Index

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

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 3 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

We saw the Straits Times Index (STI) correct in May to a low of 2,737 points, followed by a recovery in June to 2,878. Even then, it is still down 4% versus the last quarter. If you believe that the stock market is a leading indicator for the property market, then we could see downward pressure on property prices in the coming quarters.

Additional Rounds of Property Cooling Measures?

The sales volume of new residential homes by developers fell by 23% in May after a 12% fall in April. This suggests that the prices of new homes are likely under some pressure, especially given that the NUS monthly resale price index was up in April to May. Thus even if the prices of new launches correct, the strengthening prices of resale units could take up the slack.

This 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.

Many analysts are still predicting a 10% drop in property prices this year. Given that property prices for the first half of 2012 are still marginally up, these forecasts may not come true unless there is a significant correction in the coming months.