Residential property market's resilience

By Tan Kok Keong / REMS Advisors, The Edge Property | July 1, 2015 9:00 AM SGT
Why hasn’t property prices declined at a faster pace?
Singapore’s private residential property market has been the subject of much gloom and doom headlines over the past few years. Analysts have scrambled to forecast the imminent collapse of property prices, with some advocating for price falls of as much as 30%. While there have been sporadic transactions that did decline that much, the overall decline in property prices remains more moderated. According to URA, overall prices of private residential properties have decreased for the sixth consecutive quarter as at 1st Quarter 2015, but non-landed private residential property prices have only fallen by 5.4% as at 1st quarter 2015 from its peak in 3rd quarter 2013.
Low holding costs and the general lack of immediate negative catalysts have often been cited as plausible reason for the slow pace of decline in prices. In our opinion, sharp decline of prices of private residential property across the board may only start once wealth destruction starts. Such wealth destruction could be from the cumulative effect of some or all of the following factors: rising interest rates, rising unemployment, increase bankruptcies, sharp decline in economic outlook, losses in the financial markets, a sharp increase in foreigners exiting Singapore. Over the near term, any combination of such factors does not look imminent.
Barring the onset of the factors mentioned above, we believe that the surprising underlying strength of the rental market could help to cushion the price fall. The following segments will provide you with some food for thought on the strength of the rental market.
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Strength of the private residential rental market
Based on data provided from URA’s REALIS, the non-landed private residential rental market has remained relatively buoyant. The average value per contract in May 2015 was at as at S$4,054 per contract, 8.1% lower than the same month in 2014 and 12.7% below that in 2013. However, the average rental level, though weakening, remains at a high level. If you look at the total value of rental transactions, it has been increasing on a year on year basis since February 2013 until May 2015, where it suffered a slight dip of 0.1%. The number of rental contracts signed in May 2015 (4,793 contracts) is 7.2% higher than May 2014 and 16.8% higher than that in 2013. On a year on year basis, the number of rental contracts signed has been increasing since March 2013.
The data above suggests that while the average rent per contract has been declining as expected in face of the increasing completions, there has been a sustained increase in rental demand for private residential units since the end of Global Financial Crisis.
Where does this demand come from? We analysed the data from the Government’s Household Living Arrangement, published in May 2014, and the most recent data on employment to shed some light on this issue.
Changing household living arrangement
Data from the Government’s Household Living Arrangement 2014 provides a clue. While couple-based households with children remained the most common living arrangement, the proportion of such households declined from 66.5 per cent in 1990 to 56 per cent in 2010. This suggest that there is a 10 percentage point increase in the number of households with non-couple based household. In addition, the percentage of people staying alone has increased from 5.2% in 1990 to 8.2% in 2000 to 12.2% in 2010. Taken together, this suggests that there has been an increase in demand for more housing units (be it for rental or sales) due to the changing lifestyle preference. The trend has most likely continued till today and is likely to persist. This could in part explain the popularity of smaller sized units in the newer condominiums in recent years and could sustain demand for more housing units in the near future.
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Continued increase in employment of non-residents
Secondly, while the growth of foreign population has slowed due to a combination of tightening immigration policy and uncertain economic prospects of Singapore and the region, the employment amongst non-residents (i.e. non Singaporeans and non-Singaporean permanent residents) have continued to grow. Based on the Ministry of Manpower’s data, it showed that from 2012-2014, annual growth of non-resident employment was around 61,400 persons. Assuming an occupancy ratio of 3 persons to a housing unit on average, this translates into a demand of 20,466 housing units per year. This increase in demand for housing from non-residents is collaborated by feedback from real estate salespersons. This trend is in sharp contrast to previous periods of market underperformance where there was a net reduction in non-resident employment in 1999 (Asian Financial Crisis) and 2002-2003 (SARS Syndrome). With more non-residents being employed, it is natural that rental demand has been resilient.
Renting in anticipation of price falls
Based on industry feedback, after the introduction of the last set of cooling measures more households have chosen to rent rather than purchase private properties in the hope to enter the market once prices weakened enough in the next few years. While no numbers are available on how many households are in this category, the strong take-up for some new launches which are priced well could serve as anecdotal evidence of the presence of such households.
To sum up, while our view is that prices and rents are likely to continue on a moderate price fall, the dramatic headline grabbing magnitude of price falls might not be imminent. We view that Government measures is a necessary but insufficient condition for sharp price falls and that other wealth destruction factors need to fall in place for sharp price corrections on a whole market basis.
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Cooling measures in other markets could be a positive catalyst for Singapore
One bright spark for the Singapore market is that investment interest is starting to pick up based on anecdotal evidence from industry participants. One possible reason is the tightening conditions for foreign purchasers in other countries. To stamp rising prices, Britain has imposed loan limits for foreign purchasers while Australia has imposed their own form of buyer’s stamp duty and tightening of loans to foreigner purchasers. In addition, property prices in other developed cities have largely continued to rise while that in Singapore have fell, thus possibly making Singapore’s prime property appear relatively undervalued. The implementation of cooling measures in other countries and closing price gaps could “equalise” the value proposition of Singapore real estate and draw investors back to Singapore.
Lastly, in many forms, be it governance, business environment, living conditions, social stability, clean air, Singapore has progressed far beyond many of its competing cities in Asia. The billions spent in improving the infrastructure, cultural facilities and events, green spaces, sports venues and built environment have made Singapore into a world class city. Perhaps, it is about time the market re-evaluate the fair value of Singapore’s residential property.
This article appeared in The Edge Property Pullout of Issue 683 (June 23) of The Edge Singapore.
Tan Kok Keog is CEO of real-estate consultancy of REMS Advisors.