Robust buying likely to continue but risks higher

⋅ December 21, 2012  

As we approach the end of the year, analysts’ property market forecasts for 2013 and beyond are coming in thick and fast. From the reports I have read, it is quite a mixed bag – some are negative while others are mildly positive.

The forecasts in themselves are not really as important as the reasons cited to back them up. The reason I say this is that given the uncertain and abnormal global environment, I doubt if anyone can reasonably get it right – even for just the next year, let alone, many years beyond, except by sheer luck and coincidence.

For sure, the quantitative easing and low-interest rate policies adopted by policymakers in the United States and other major economies will mean continued and sustained upward pressure on asset prices in all AAA-rated economies, not just Singapore.

I am pretty sure there is already more than ample liquidity in the local market to send property prices skyrocketing, and they would have had it not been for the cooling measures imposed by the Government.

The Government has also showed a firm commitment to supply as much housing as the market demands. Indeed, a strong and steady supply of private housing sites has kept panic buying to a minimum and brought stability to home prices.

But there is still unrelenting upward pressure on prices, which is why I believe more cooling measures will inevitably be introduced in the near future – at timely intervals.

Present and future cooling measures will likely keep housing prices pretty flat in 2013 and in the future – meaning there is little upside.

The robust buying will likely continue in 2013, with investors dominating sales in the private housing market while owner-occupier demand shifts down to Executive Condominiums (EC) and new Build-To-Order public housing flats.

I do not expect the EC demand to cool down next year or reach a saturation point soon. In fact, the current ECs with their larger apartment sizes and improved quality may turn out to be better and safer buys than shoebox units in the private housing market should there be a sharp price correction. A trend of falling prices usually puts a halt to investor buying until they become bargains, whereas owner-occupier purchases depend on housing needs.

Also, investment buying in the Singapore context is heavily reliant on low interest rates and not on rentals, as some may think.

Most of the current investor buying is for properties under construction. Should interest rates suddenly spike, the strong “genuine” demand may vanish overnight.

But if interest rates stay low, I agree with some analysts that prices are unlikely to correct even as more apartments are completed and there is keen competition for tenants. As holding costs remain low, more and more apartments will likely become vacant, crazy as this may sound.

Even as landlords lower their rents with more supply coming on stream, most are unlikely to sell below valuation if they can hold on to them. Seasoned investors will tell you that property investment is a holding game. If you can get past the critical periods, you will be home and dry.

But while prices are not likely to correct, it does not mean they will not: All it takes is one black swan event.

What most readers of these property reports do not get to read is that the risk of a sharp price correction – while unlikely – is greater in 2013 than in 2012. As the construction of more and more homes is completed, this risk will continue to grow in 2014 and beyond, even if the probability of a correction occurring is still low given the present global macro-economic factors.

The way to address this problem is to build in bigger buffers and greater safety margins, but how many of us do that?

By Colin Tan – Head of Research and Consultancy at Chesterton Suntec International

Source : Today – 21 Dec 2012