End of long winding road of residential property price decline in sight?

By Ong Kah Seng / R'ST Research, The Edge Property | January 18, 2016 10:00 AM SGT
The year started on a positive note for Singapore’s residential properties, when the Urban Redevelopment Authority (URA) released flash price estimates for private residential properties on Jan 4. Overall, private residential property prices dropped 0.5% q-o-q in 4Q2015, compared with 1.3% in the previous quarter. For the whole of 2015, prices fell 3.7%, compared with 4% in 2014.
There was also cheer in the public housing segment, where prices of HDB resale flats rose 0.2% q-o-q in 4Q2015, after nine consecutive quarters of decline. Resale flat prices fell 0.4%q-o-q in 2Q2015, and 0.3% q-o-q in 3Q2015.
Has the private residential property and public housing segment reached the end of the long winding road of price declines with the encouraging performance in 4Q2015?
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The last quarter of the year usually sees seasonally weak buyer sentiment. Hence, the seemingly better property prices might be a sign that buyers are returning. We have to note, however, that this is only the first quarter of improved performance. Can it be sustained?
HDB resale flat prices to stay flat in 2016
The marginal price increase in4Q2015 has reinforced recent observations that prices of resale flats are stabilising. The first sign of that was in 2Q2015, when prices fell just 0.4% q-o-q, compared with 0.3% q-o-q in 3Q2015.Prior to 2Q2015, prices had dipped by more than 1% q-o-q in most quarters.
The 0.2% price increase in 4Q2015 shows that the long period of quarterly price falls may be over, although significant price increases in every quarter of 2016 is unlikely. This year is likely to see flattish, stable resale flat prices.
The price increase in 4Q2015 reflects some improvement in buyer interest for resale flats. While HDB resale flats adopt a fairly free market mechanism compared with build-to-order flats and are also priced much higher, buyers still consider resale flats a “necessity” — more of an essential housing product than investment property, such as private properties. So, when HDB resale flat prices undergo a soft landing, people are encouraged to buy.
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Buyers had expected prices to tumble. When that it did not happen, they gave up waiting and, from 2H2015, started buying resale flats, at reasonable prices.
The increase in 4Q2015 resale prices could just be a statistical blip, or random occurrence. It is not a definitive sign that prices are set to recover significantly or consistently. But if 1Q2016 does see another price increase, of at least 0.5% q-o-q, we can safely deduce that prices are on the way up.
In 2016, however, it is unlikely that resale prices will climb every quarter. They are likely to remain fairly flattish, with a quarter or two achieving less than 0.5% q-o-q price increase, followed by a marginal decline in the next quarter. Altogether, we expect to see no change in resale prices for the whole year of 2016.
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Two years after the implementation of the MSR cap, buying interest in HDB resale flats has evidently stabilised and reached an “equilibrium point”. This is the point where prices have corrected until they are finally more affordable. It is unlikely that the MSR cap will be lifted anytime soon, in case affordability issues and skyrocketing prices recur.
There are emerging headwinds for larger flat types too. More four- and five-room HDB flats will be put up for resale in 2016, as substantial numbers of private residential properties and executive condominiums will be completed.
Private residential property owners can hold on to their units, or sublet them. But more far flung flats are likely to be put up for resale, owing to weak subletting demand.
Four- and five-room flat owners form the majority of HDB upgraders. So, resale prices of such flats may come under more pressure in 2016, compared to that of other flats. Nevertheless, their flats are of a sufficient size for families, so they should still see fairly positive buyer interest. A substantial number of flat buyers will opt for the recently introduced Proximity Housing Grant, to better afford a unit.
Private residential prices on track for soft landing
The fall in private residential properties seen in 4Q2015 is expected to continue. Price corrections have been marginal (an 8.4% decline since the last peak in 3Q2013) and prices have yet to match buyers’ expectations and affordability. Fundamentally, private residential properties fall under the category of aspirational property products, unlike HDB flats, an essential housing product, for which stronger demand usually kicks in after a visible price reduction or reasonable pricing are established.
Good sales of The Poiz Residences, Principal Garden and Thomsons’ Impressions in 4Q2015 also contributed to resilient pricing of homes in the RCR. They have strong selling points and are offered at attractive prices. However, this means that demand for private residential properties remains project-specific and buyers are price-sensitive.
This year, developer sales activity is expected to be fairly sluggish, but we can expect improved developer sales, which could possibly total 8,500 to 9,000 units — at least 10% more than the estimated 7,600 units sold in total by developers in 2015.
Sales in 2016 will still be driven mainly by competitive pricing. So long as an OCR project that is a distance from the MRT station is not priced at more than average price of $1,000 psf, it can expect keen buyer interest (for example, High Park Residences). Those who own property located beside an MRT station can expect warm buyer interest if it is priced at not more than the average $1,250 psf. An RCR project can see good sales if units are priced between $1,300 and $1,400 psf, or repriced to this level to clear unsold units.
Marginal price decline compared with historical peak and trough
Notwithstanding the lower price fall in 4Q 2015,we should note that 4Q2015 was the ninth quarter of price decline for private residential properties (starting from 4Q2013),resulting in a total 8.4% average price fall for private residential properties.
Prices of private properties fell by a total of 24.9% between 3Q2008 and 2Q2009 during the global financial crisis, and about 20% from 3Q2000 to 1Q2004 (the dot.com and SARs period). Prices fell by 44.9% between 3Q1996 and 4Q1998 (cooling measures were introduced in 1996, and the Asian financial crisis hit after that).
The recent soft landing of private residential prices has made homes more affordable, although it did not result in the significant price fall that opportunistic buyers anticipated. Meanwhile, sellers/developers are not suffering from major losses.
Summary of peaks and troughs in URA’s overall private residential property price index (since 1996)
PEAK
INDEX VALUE DURING PEAK QUARTER
TROUGH
INDEX VALUE DURING TROUGH QUARTER
NO OF QUARTERS OF CONSECUTIVE QUARTERLY PRICE DECLINES
CHANGE IN INDEX FROM PEAK TO TROUGH (%)
Q3 2013
154.6
Q4 2015*
141.6
9
-8.4
Q2 2008
126.9
Q2 2009
95.3
4
-24.9
Q2 2000
100.4
Q1 2004
80.3
15**
-20
Q2 1996
129.7
Q4 1998
71.5
10
-44.9

*Based on flash estimates for 4Q2015; may not be the trough quarter but prices are lowest since 3Q2013

** Inclusive of 0.5% q-o-q increase in 3Q2002, which was a blip as it was followed by further decline from 4Q2002

Source: URA, R’ST Research

Attractive offers at auctions
As the gentle price decline continues into 2016, we can expect more people to turn to auctions for value buys or to scour for newly completed property in the areas they are interested in. Properties are attractively priced at auctions, which serve as a good avenue for owners to off load their units quickly. Even if it does not get sold, potential buyers could take an interest in it and negotiate for it after the auction.
More properties will be put up for auction, especially mortgagee sale, in 2016, by owners who want to offload their units fast and move on. Generally, buyers and owners have changed their mind-set about auctioned properties: They are not necessarily underperforming properties, but an efficient way to tap sales opportunities.
Silver lining for leasing market
More tenants are expected to leverage on lower rents of private residential properties. In fact, more non-landed private residential leases we resigned in 2014 than in 2013. Likewise, 58,444 non-landed residential leases were signed between January and November 2015, compared with 56,417 for the whole of 2014. But why did private residential rents continue to dip in 2014 and 2015?
Rents have weakened because there has been a substantial rise in new private residential completions from 2014. Even if leasing demand had stayed the same, it is insufficient to fill up the total number of units completed recently. Also, more small condos have been completed in recent years, so the structure of the leases has changed materially: More leases have been signed annually, but they could be for smaller condos.
The silver lining is that rents would have fallen to more attractive, affordable levels for tenants in 1H2016. So, more tenants may take this opportunity to stretch their rental budget by renting rooms or units that are larger than what they require. Or, they could rent a unit in a more convenient or upmarket locality.
Another bright spot is that HDB flat owners who have bought ECs and BTOs flat are eager to sell off their current flat. Many of them even do it before their new unit is completed. In the meantime, they may rent a private home for a year or so, to enjoy the condo facilities before their new BTO flat or EC is ready.

Source: URA, The Edge Property

Start browsing for listings at The Poiz Residences, Principal Garden and Thomsons’ Impressions.
Ong Kah Seng is director of R’ST Research. He can be reached at kahseng.ong@rstresearch.com.sg.
This article appeared in The Edge Property Pullout, Issue 711 (January 18, 2016) of The Edge Singapore.