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In an interestingand contrarian report, Dr.Chua Yang Liang of Jones Lang LaSalle argues that the surge inupcoming supply will not cause property prices to fall. In thisarticle I will sum up his arguments and add some of my own thoughts.
Recently, several propertyanalysts have been arguing that a correction in the Singaporeresidential market is in the pipeline in 2014/2015 due to the largestock of housing completions during that period (~50,000 public +private units per year), which is 2.5 times the average completedsince 2001.
Dr. Chua believes thatresidential property prices will not fall despite this large increasein supply for the following three reasons:
1. TheSingapore residential market has not corrected based on supply alonein the last decade
Dr. Chua calculatestwo metrics he terms as the short-term andlong-term balance of housing stock. The short-term balance compareshis estimated household demand formation (e.g. from marriages andimmigration) with the housing completions based on URA and HDB data.The long-term balance is the cumulative sum of the short-term balanceover time.
He argues that if youcompare this short and long term balance of housing stock with theURA Property Price Index (PPI), you will find that the PPI is mainlysentiment and not supply-driven. For example, the two majorcorrections in the PPI since 1998 were in 2000-2001 and 2007-2008,which happened due to external shocks and despite the housingbalances indicating a stock shortage.
2. Immigration islikely to continue and support the demand for upcoming new supply
Dr. Chua believes that therecently mentioned population target of 5.5 million by 2050 is toolow, as it suggests a growth rate of just 0.2% per year over the next40 years, which will be insufficient to support economic growth.
He thinks in the low casewe should use the 6.5 million target by 2050 (which was used by theURA in the 2000 Concept Plan), and in the high case we could hit 5.5million by 2015 (which would involve keeping the resident populationgrowth rate at the same pace as 2010 while slightly lowering theforeign population growth rate).
This continued growth inpopulation will thus create new demand for the upcoming supply.
3."Residual demand" backlog is likely to keep prices stable
The population hasincreased from 4.02 million people in 2000 to 5.1 million in 2010, a2.4% annual compounded increase (with the non-resident populationgrowing at 5.6% compounded). But the total housing stock (private andpublic) has only grown from 956,275 to 1,158,885, or a 1.9% annualcompounded increase.
The net effect isthat the size of the average national household (Dr. Chua uses totalpopulation divided by total housing stock excluding worker andstudent dormitory housing, which isdifferent from the Census definition) has increased from 4.21 peoplein 2000 to 4.37 people in 2010.
Dr. Chua believes thatthere has in effect been a "backlog" of demand created by theinability of supply to catch up with rising demand over the pastdecade, and thus the upcoming supply (together with immigration) willmerely result in a relieving of this backlog and a balancing of longterm supply and demand, with the average household size falling backto its long term average of 4.08 with a population of 5.5 million by2015.
The large upcoming supplywill thus not crash the market but instead help to correct the longerterm shortage of housing, and Dr. Chua forecasts that the PPI willstill record an average growth of 1.8% till 2015 (based on apopulation growth target of 6.5 million by 2050). If the populationincreases to 5.5 million by 2015, Dr. Chua forecasts a continuingdeficit in housing stock, thus pushing up prices by 7.5% per year.
Dr. Chua's bottomline isthat no matter what the immigration levels are, we will not see a dipin the PPI (barring an external shock). He also recommends thatpolicymakers continue to release land to support a supply of 16,000to 24,000 housing units per year.
My thoughts onDr. Chua's arguments
I think Dr. Chua's"residual demand" argument is interesting and introduces thenotion of a long term demand backlog caused by the inability ofsupply to catch up with our population growth overthe last decade (mainly driven by immigration).
I'm not sure, however,about his forecast of a steadily rising PPI.
First, while theupcoming supply may serve to balance out the demand backlog in thelong term, I think that in the short term there can still be aserious case of indigestion by a large amount of supply coming ontothe market over a short time period.
Second, Dr. Chua takes thecurrent price levels as fair and then forecasts the matching ofsupply and demand going forward. Could the current price levelsalready reflect a severe supply shortage situation, and correct to"fairer" levels when the new supply comes online? Markets aremade at the margin, and prices are determined when marginal demandmeets marginal supply.
Thirdly, there could alsobe different outcomes for different segments of the market. Forexample, the rental market for shoebox units is predicated on thecontinuing inflow of professional immigrants, which will be affectedif this does not happen.
Fourthly, as Dr. Chuapoints out himself, in the short term the PPI is largely driven bysentiment and not by movements in supply. We could potentially seeexternal shocks coming from a developed world recession, Europeancrisis etc., which would impact Singapore's open economynegatively. At the same time, many international investors are alsostarting to see Singapore and the Singapore Dollar in particular as a"safe haven". This could lead to foreigners continuing to supportthe high end market, as we've seen in Hong Kong with the influx ofChinese buyers.
With so much uncertaintyin the markets, I believe investors should adopt a cautious attitude,but be on the lookout for opportunities - as we saw during the lastGlobal Financial Crisis, the window for buying low can come and goquickly!
Thisarticle is posted courtesy of www.Propwise.sg,a Singapore property blogdedicated to helping you understand the real estate market and makebetter decisions.
