Experts Sanguine About Real Estate In Singapore

Nov 10, 2007

“To buy or not to buy?” This intriguing question has attracted a full-house turnout
of about 170 investors at a dinner hosted by financial advisory firm ipac.

While there may be some concerns about the withdrawal of deferred payment scheme for uncompleted projects, the good news is that none in the panel of experts at the evening event foresee a property bubble.

The surprise move by the government to withdraw the popular deferred payment scheme, the rocket fuel for the recent property bull-run has cast a cloud over residential property's upward price trend.

Here is a list of the panel’s observation
Positive factors

The economic fundamentals unpinning the recent property bull-run are growth in employment, strong wage rise and increase in personal spending power. The evidence is in the strong take up rate of mass market properties. If there is a property bubble, it is in the early stages.

With employment booming, wages soaring and the real mortgage rate at its lowest level since 1990, the outlook still looks very promising.

The cost of servicing mortgage debt is at just about 14% of household income, compared to 50% in mature markets like London. The healthy gauge for such a ratio is around 40% for borrowers in developed countries.

Property values are still lagging behind the levels of the 1996 boom. When adjusted for the growth in incomes, the private residential property price index is actually only more than half of what it was in 1996.

The price gap between new and resale homes in the prime districts has widened sharply in 2007, reaching a peak of 60%, against a medium to long-term premium gap of 32% to 38%. This has been caused by the old deferred payment scheme which tended to inflate prices a little.

Prices in the resale market tend to reflect genuine demand better as there is no deferred payment scheme to help buyer tide over the initial period. So, when a purchaser does not have sufficient cash or could not qualify for a bank loan, he simply cannot buy.

With prices soaring in the prime areas, rentals in that segment have edged below the 10-year Singapore bond yield.

With the elimination of a speculative element, i.e. the old deferred payment scheme, prices of new homes will take a breather in the near term of next two to three years. In addition, the higher supply of new stocks in the next two to three years will no doubt soften the price; but, a sharp correction is not likely.

However, it does not mean that investors should altogether exit the real estate investment. In fact, property's ability to help diversify a portfolio is unrivalled by other investments such as stocks and bonds.

For example, property provided a positive hedge against inflation between 1992 and 2007, a period in which stocks and bonds did not provide such a hedge.

While all types of property offered a more-than perfect hedge against inflation, the best hedge was that offered by detached housing, followed by semi-detached homes.

Concerns ahead
(i) Price gap widening

The price gap between new uncompleted homes and resale homes should narrow from now on with general prices easing. In the last one-and-a-half year, price hike was around 20% or more that was way above the country’s GDP growth. In the near time, price rise should be within 10% in line with nominal GDP.

(ii) Yield may be falling

In other words, retail investors going for yield should not risk their nest-egg if their portfolio is not huge enough. For better yield, investing in a global property fund or a local Real Estate Investment Trust (REIT) is better.

Forecast ahead

While sentiment will be weakened by the negative news originating from the US in the short term, property prices especially residential properties are supported by strong fundamentals such as high wage increases and the inherent constraint in physical supply of real estate.

However, Asia as a whole will be better off over the medium-term. Asian property prices were not high relative to per-capita income, and advances have been modest compared to those in the UK, the US and Australia. The drivers include low real interest rates and positive demographics.

Rental rates for residential units will continue to climb on the back of the relative net increase in housing stock due to low completion and relatively high demolition due to en bloc sale. The rise in rental rates will likely continue to support further price appreciation.

In the nutshell, where Singapore as an economic unit is heading will decide the direction of real estate investment. At the end of the day, it is whether Singaporeans will be able to keep their jobs or businesses and will their salaries/profits increase.