The Comforts Of Home Prices

Source : The Business Times, January 17, 2009

The residential property market has started to slide, resulting in more affordable homes.

WHILE many will be worrying about losing the roof over their heads, 2009 may just be the year for some to find a new one. From luxury to mass market offerings, homes are now more affordable to a wider and more diverse group of buyers.

And with diversity comes stability, says Jones Lang LaSalle South-east Asia research head Chua Yang Liang.

One of the few voices of optimism in 2009, Dr Chua says that affordability has improved by some 5-24 per cent and that in any market, 'there will always be opportunity'. 'While we do not deny that the market has to correct in the short term, the medium to longer term opportunities are looking brighter by the day,' he adds.

The market has already started to correct with the official property price index having fallen for three consecutive quarters.

Dr Chua adds: 'People should invest on their own terms and not try to plan based on market trends.

Those who insist on definitive evidence of market trends can look to business cycles.

Cushman and Wakefield managing director Donald Han says that the property market tends to lag some 6-12 months behind local economic growth indicators. While Mr Han says it is difficult to pinpoint when a cycle troughs or peaks, 'it is okay to buy or sell at some 10 per cent off from these levels'.

But Mr Han also pointed out that the average holding period for investors is between three and five years with owner occupiers holding for between four and eight years. 'And as market cycles get shorter over time, one's commitment to buy must include commitment to hold over and beyond these market cycles,' he added.

Property cycles are difficult to predict. Estimates for when the bottom of the current cycle will come are at least six months apart.

UBS Investment Research appears to be the most optimistic, saying that the property market slide may turn as early as in the third quarter of the year.

'In the last trough in Q3 '98, the URA residential price index - which tends to lag the market - had already weakened for six quarters and residential vacancy rates had risen for eight quarters before a recovery began. GDP growth also hit a trough of minus 4 per cent in Q3 '98,' UBS notes in a recent report.

But UBS also believes that sales volume could stay weak until vacancy rates peak. And it expects private housing vacancy rate to rise to 10-11 per cent by end-2009.

Goldman Sachs reckons the bottom of the market is more likely to be mid-2010, highlighting that since 1980, there have been three private residential property down cycles, each of which lasted between 2.5 and 3.5 years.

Expecting a further 26 per cent and 31 per cent declines in mass and prime residential prices respectively by 2010, Goldman Sachs says: 'At these new prices, affordability would improve to levels where we believe buyers would be lured back.'

Homes will definitely become cheaper but will they also become more affordable?

Affordability is generally defined as housing costs as a percentage of household income.

Goldman Sachs says that affordability needs to improve for volumes to recover too. 'We believe that even if the macro economy stabilises and confidence returns to the Singapore market, residential demand is unlikely to quickly recover, as the affordability ratio for the average household has dipped and is less favourable when compared to 2001 levels,' it added in a recent report.

Focusing on the top 30 per cent of households, it also notes that the current monthly mortgage payment for private mass residential as a proportion of take-home income is high at 43 per cent, compared with 33 per cent during the Q2-Q4 2001 period.

And affordability will further deteriorate if banks tighten credit on mortgages or loan quantum, and the government cuts employers' CPF contribution to stimulate the economy.

'Relative affordability' may have improved, but Chesterton Suntec International's head of research and consultancy Colin Tan asks: 'Does it change the market situation?'

'While some contend that affordability of the private residential market has improved, the reality is that the vast majority of properties currently on the market are still not affordable to the general population,' he adds.

As Mr Tan notes, CPF cuts could be a big deterrent for potential home buyers. Saying that any cut could have a 'psychological' impact, he adds: 'Right now, uncertainty over actual rate cuts - whether one per cent or 5 per cent, will deter people from buying. And when it happens, there will be uncertainty about future cuts. Although the government will probably do the cut once, this can play on the mind of potential buyers for a long time.'

Indeed, one does not have to look too far back to realise how irrational buying property really is, regardless of price and affordability.

'In the last two to three years, many people bought property thinking that prices would continue to rise,' remembers Chua Chor Hoon, DTZ Research senior director.

Interestingly, the opposite is also true.