: Value Investing Forum - Singapore, Hong Kong, U.S.

Full Version: Answer to property conundrum may lie outside the sector
You're currently viewing a stripped down version of our content. View the full version with proper formatting.
This article is scary - assuming many Singaporeans have a stake in property, what will happen when prices start to fall? (Or perhaps no one even believes it can happen any more!)

Business Times - 23 Jun 2011

Answer to property conundrum may lie outside the sector

Trusty investment alternatives with decent returns needed



AMID the ongoing discussion on how best to tame Singapore's private housing market, a closer look is needed at the reasons for the strong demand. The answer to this property question may well lie outside the sector.

After the global financial crisis, buyers have demonstrated a voracious appetite for private homes in Singapore. From just 4,264 private homes sold in 2008, the year in which Lehman Brothers collapsed, sales jumped to 14,688 units in 2009 and a record 16,292 units last year. In the first five months of this year, close to 7,000 private homes were sold. Market expectations are that 14,000-16,000 units may be sold for the full year.

The government has responded to the strong demand by stepping up land sales. However, land prices have continued to climb until very recently - when the cautionary pronouncements of National Development Minister Khaw Boon Wan kicked in.

The unexpectedly strong revival in home buying in 2009 took even developers by surprise. To replenish their landbanks, they scurried to apply for the release of sites from the government's reserve list. This saw the government reinstating the confirmed list - where sites are released according to a prestated schedule, regardless of demand - from H1 2010; for the whole of last year, the government sold a record volume of land which can potentially generate some 10,060 private homes (excluding executive condos). This year, the plan is to sell land for at least 14,525 private homes.

Despite the substantial Government Land Sales Programme, land prices continued to appreciate until very recently, in the face of competition from developers looking for replacement land because of strong sales at property launches. In short, the competition sent land bids northwards, in turn resulting in developers launching new projects - at quicker turnaround times and higher prices, feeding on strong demand for end-units. These developers then again rushed to refill their landbank, in what some analysts have termed a vicious cycle.

There is a limit to how much the authorities can further ramp up supply - considering the danger of a potential glut from the build-up in the pipeline, with some 53,000 private homes that will be looking for buyers over the next few years, according to latest official estimates.

On the demand side, the authorities have rolled out a series of cooling measures since late 2009, including lowering loan-to-value limits for those already servicing an existing housing loan and imposing a seller's stamp duty to deter speculators. However, these have resulted in 'knee-jerk' reactions each time: buyers withdraw temporarily, to re-emerge a little later. The buying momentum continues.

Yes, short-term speculators in the property market have been flushed out by the most punitive measure thus far - a seller's stamp duty of 16 per cent for those who buy a private home on or after Jan 14 and sell it within a year.

Nonetheless, a lot of property buyers - both owner occupiers and investors - remain in the market, even as they await further measures, including an increase in the income ceiling for households who buy flats from the Housing & Development Board.

So just what is feeding the property buying frenzy?

Yes, there are new households - comprising Singaporeans and the permanent residents (PRs) settled here - that will generate a certain amount of owner occupation demand for private homes. But there is also strong investment demand for private homes on the island, driven by liquidity both at home and from overseas investors looking for a place to park their money. The low interest rate environment has also been aiding property purchases.

Those worried about inflation may also have found investing in property a good hedge.

Even foreigners who are not PRs here have been drawn to the island's property market, thanks in no small measure to the success of Remaking Singapore. The completion of the two integrated resorts and other attractions as well as Singapore's development as a wealth management hub have drawn foreign monies to our shores, and real estate is an appealing investment. High-end residential property prices in Singapore are considered relatively attractive compared with the likes of Hong Kong, London and Tokyo.

The disenchantment with financial products post Lehman's collapse has also served to rekindle Singaporeans' love affair with property.

One seasoned property consultant even shared his views with BT about 'excessive materialism' in Singapore. 'There is this sense of wanting more and more all the time, of never being contented with what one already has.

'Singapore is an achievement-driven society, striving for excellence and wanting to be No. 1 all the time; this goes to our psyche and it goes into our investment behaviour,' he added.

This begs the question whether there is overinvesting in property in Singapore.

If so, this may have been fuelled by what many Singaporeans have been feeling for some time now - a lack of trusty investment alternatives with decent returns.

If they leave their savings in the bank, they stand to earn just 0.35 per cent annual interest on a one-year Singapore-dollar fixed deposit. This is unlike Australia, where one can earn 6 per cent annual interest on a one-year Australian-dollar term deposit.

The challenge will be for the authorities, financial institutions and other players to come up with some offerings that will hopefully reduce the over-indulgence in property here and the potential risks that accompany this.