Is fear of residential supply glut overblown?

By
Feily Sofian
,
/ The Edge Property
|
October 24, 2015 8:00 AM SGT
Landlords may opt to leave their properties vacant if rents fall beyond a certain level as they would not justify replacement costs for the wear and tear inflicted by tenants. As a result, the dreaded supply glut and sky-high vacancy rates alone may not translate into a steep rental decline. Landlords may also prefer to wait for a market recovery rather than commit to a low rent over the next one to two years.
Therefore, it may sound counter-intuitive but a study by The Edge Property shows the correlation between vacancy and rental performance weakens as vacancy rates trend up.
When vacancy rates of private non-landed homes were within a healthy range, rents behaved according to market expectations. For example, when vacancy rates were between 6% and 6.9%, rents increased by 0.6% per quarter on average. And when vacancy rates climbed to between 7% and 7.9%, the rental increase slowed to 0.5% per quarter. As vacancy rates trended up to between 8% and 8.9%, rents declined by an average of 0.8% per quarter. No surprise here.
However, when vacancy rates were at 9% to 9.9%, rents declined by just 0.1% per quarter on average. Similarly, when vacancy rates were at their historical high of 10% to 10.9%, rents slipped by just 0.2% on average per quarter (see Table1). In other words, high vacancy rates of 9% or more did not cause rents to nosedive.
Table 1: High vacancy rates above 9% did not cause rents and prices to plunge
VACANCY RATE (%)
AVERAGE Q-O-Q CHANGE
RENT (%)
PRICE (%)
5 to 5.9
4.6
6 to 6.9
0.6
7 to 7.9
0.5
8 to 8.9
-0.8
9 to 9.9
-0.1
10 to 10.9
-0.2

Source: URA, The Edge Property

There were a total of 23 quarters between 1Q1999 and 2Q2015 when vacancy rates were at least 9%. Out of that, 13 quarters witnessed rental increase and only 10 saw rental decline.
A simple linear regression between vacancy rates and rental index showed an R-square value of 0.48. Another regression between vacancy rates and percentage change in rents showed an even weaker R-square value of 0.16.
The same can be said about prices. Between 2Q1988 and 2Q2015, there were a total of 31 quarters when vacancy rates were at least 9%. However, out of that, about...