Since the best trilogies come in threes, I guess this will be the final one of the series. In part 1, I talked about the risk of additional cooling measures. In part 2, I discussed the risk of over-leverage and increase in interest rates. In this part I shall talk about the risk of over-supply in the market.
Risk 4: Risk of over-supply
Another reason why the property market may come down is over-supply of properties, or to be more specific, more supply of properties than demand. Economics 101 tells us that price is determined by the interaction of demand and supply. When there is more demand than supply, prices go up. Conversely, if supply exceeds demand, prices come down. In order to determine the risk of over-supply, we need to split it up into the different categories of housing.
In the last few years, HDB has not kept up with demand as our immigration policy was relaxed to allow more foreigners to become PRs and citizens. The increase in demand led to high prices of HDB flats and narrowing of the public-private housing price gap, which in turn led to higher demand for private property. In order to deal with this imbalance, Mr Khaw Boon Wan, the Minister of National Development, has committed to building enough HDB flats as required to match demand. Assuming that he is able to effectively match the demand, prices of resale HDB flats should come down quite a bit. Since supply is only increased to match demand, unless they grossly overshoot the targets or there is an exodus of citizens and PRs, prices should not crash. Besides, with the Built-to-Order system in place, flats are only built when there is enough demand for them, so over-supply should not be such a big concern.
Private shoebox apartments
Defined as apartments of less than 500 sqft, these tiny units have been in the news a lot recently, what with Mr Khaw talking about controlling the building of these type of apartments, and Capitaland’s Mr Liew Mun Leong saying that it was inhumane to build such tiny living quarters for people. While I disagree with the definition (I prefer to judge whether it is a shoebox by sqft per bed), I do agree that developers have been a little too exuberant about the prospects of such units, increasing the supply to an unsustainable level. Traditionally, these types of units have been built in the city centre, usually as studios or 1-bedroom units. This catered mainly to singles or couples with no children, working in the city. This is also not unusual among the big cities like London and New York.
However, developers drew upon the success of such units in the city that were able to get exceptionally high psf prices and rental, and transferred the concept wholesale to the non-prime area, marketing them as cheap, affordable investment properties with potentially high rental yield to the masses. I think the people who put down money based on such marketing could have been misguided. The apartments may be affordable with quantum around $500k, but usually far from cheap from a psf perspective. The high rental yield is also not easy to realise, as potential tenants will be able to get units twice as big for not much more. I believe that investors buying shoebox units in non-prime areas will be sorely disappointed with their performance. It is from this point of view that I think that shoebox units will face over-supply conditions, and lower prices in the years ahead.
Private super-luxury apartments
With the implementation of the 10% ABSD for foreigners, activity in this sector has slowed to a crawl. Foreign proportion of purchases has reduced significantly from 20% in 1Q 2011 to merely 7% in 2012. I think that it’s not that they can’t afford it, they just don’t like the idea of paying taxes to the government. As a result, supply has temporarily exceeded demand. However, with fewer new projects coming online, and developers having to give discounts to offset the ABSD impact, the imbalance should not be so overwhelming as to create a crash in prices due to increase in demand from domestic investors who only have to pay 3% ABSD. Foreign investors should also eventually come around and start buying again, as Singapore is still the best viable investment destination due to its safe and stable environment.
Other private apartments
According to Savills Research, the number of launched but unsold properties reached a record 8,245 units in May, including 933 EC units. However, we cannot simply look at this number and determine that there is over-supply. We need to dig deeper to find out where the empty units are, and why they were not taken up. It could simply be that certain locations were not ideal, developers have rushed to launch projects, or even that the developers are holding back units. Unfortunately, I can’t find enough data on this and thus it remains inconclusive for now.
Due to limited number of such properties, this category will never be in over-supply. Therefore, prices should be reasonably well-supported even with uncertain economic conditions.
En bloc activities
En bloc activity has slow down a lot due to the ABSD. Developers, as non-individual buyers of property, have to pay ABSD when buying land en bloc or through the GLS program, but can apply to have it waived if they intend to develop it. However, if they do not develop and sell all of their units within 5 years, the waiver lapses and they will have to pay ABSD. As a result, en bloc of large developments has all but stopped. For prime districts, developers are thinking twice even for smaller plots, as demand has slow down. Therefore, supply of new condominiums should slow down somewhat going forward.
Since this is the final instalment for the series, here is a quick recap on everything said previously:
|1. Additional cooling measures||Unlikely since mass market buying for own stay or primary investment is pushing up prices|
|2. Dip in prices||Unlikely to cause crash due to regulated low leverage|
|3. Increase in interest rates||Unlikely for next 2 years due to slow global economy, but need to factor in since property is a long term investment|
|4. Over-supply||Depends on sector, but most at risk is shoebox apartments in non-prime areas. In other sectors, there may be temporary over-supply but should stabilize in the mid-term|
As far as I can see, the property market in Singapore looks to be rather stable in the next couple of years, with no big crash in sight. However, those banking on their HDB or non-prime shoebox units to go up significantly may be disappointed. The measures implemented by the governments like low leverage and seller’s stamp duty will prevent any big property blowout ala US or Europe, and at the same time slow down the market to prevent bubbles. At the same time, interest costs will remain low for some time, but property investors will do well to put in buffers for their longer-term holdings as interest rates will not stay low forever.