Time To Lower Home Prices

Source : The Straits Times, Dec 31, 2008

Property developers should consider this step to lure back buyers

WHEN a property boom here ends, the first casualty is usually home supply.

Sure enough, the Government put a stop to new land sales early this month, as it did in the last two downturns, making it as good an indicator as any that a property slump had arrived.

Developers have also been cutting supply throughout the year, pushing back en bloc redevelopments and putting some launches on hold indefinitely.

But though reducing supply is necessary to prevent the market from collapsing, it is clearly inadequate as a cure at this point. No land plots have changed hands for months, new launches have slowed to a trickle - and yet buyers are still not biting. Property ads have dried up and showflats are starting to resemble ghost towns.

When sales came to a standstill this year, developers blamed the financial crisis and government policy actions, such as the removal of the deferred payment scheme. But house hunters pointed to just one reason: Home prices are still too high.

The economy has shrunk for the first time since 2001, mass retrenchments are on the cards, and monthly sales of new homes have plummeted so much that experts warn total sales this year could reach an 18-year low. Yet private home prices - at least according to the Urban Redevelopment Authority's (URA) price index - have not dropped by much.

In the third quarter, the URA's price data registered a fall of 2.3 per cent from the second quarter, after rising about 4 per cent in the first half of the year. This means prices in September were still higher than in January.

Anecdotally, analysts estimate that prices in the fourth quarter fell by up to 20 per cent in some developments. But prices jumped so much in the recent upturn - 31 per cent last year alone - that even if the URA's index does log an unlikely 20 per cent drop this quarter, prices at year-end would still be higher than at the start of last year, and far above the pre-boom levels in 2005.

Not all developers can cut prices for their projects without incurring big losses, especially those who bought plots at the peak of the boom last year. But developers who were canny enough to pick up land at the trough of the market have plenty of room to manoeuvre.

One example is CapitaLand's Latitude condominium at Jalan Mutiara. The developer bought the site for about $500 per sq ft (psf) in 2005 and sold units up to last month at $2,400 to $2,500 psf.

But down the road, Mutiara View is going for under $1,200 psf, while across the street, the new boutique condo RV Suites has been sold for $1,300 to $1,400 psf. According to agents, CapitaLand has quietly lowered prices recently to $2,000 to $2,100 psf.

Hong Leong's Aalto along Meyer Road is another example. The site was bought for about $410 psf in 2005, but units were sold for well over $2,000 psf last year and this year. No new units have been sold since May, according to URA data.

To be sure, there are valid reasons for developers not to cut prices.

For one thing, selling homes at lower prices could result in a fall in the valuations of their properties, which could in turn hurt their balance sheets and make it more difficult for them to raise funds in an already tight credit market. And some argue that slashing prices could also set off a price war.

But there are also compelling reasons to start lowering prices. Key among them is that the see-who-blinks-first game is clearly turning in favour of buyers. Prices are already falling, pushed down by smaller developers squeezed for cash and individual home sellers anxious to offload their units.

A boutique condominium in the Novena area reportedly gave significant discounts - from over $1,300 psf down to just under $1,000 psf - after the financial crisis hit hard in October. At soon-to-be-completed developments such as City Square Residences in Kitchener Road, prices have fallen from a high of over $1,000 psf last year to less than $800 psf for some units in recent months.

Developers have said for months that they will maintain prices and ride out the storm. But the situation is set to worsen sharply for sellers as the economy contracts sharply. Even developers who can hold out are likely to find their property valuations hit anyway as prices come down throughout the market.

Lowering prices will bring buyers back into the market. Many have been waiting on the sidelines since early last year, when prices starting shooting up beyond their means.

Evania, a 35-unit condo in Upper Paya Lebar, moved 15 units last month after dropping prices from nearly $900 psf in March to just above $600 psf.

More positive news like this is exactly what is needed to restore sentiment in the market.

As for the threat of price wars, there is little basis in the argument. Prices are going to fall in any case, with or without a price war. The suggestion here is not for steep price cuts, just 'realistic' prices that will tempt buyers back into the market.

City Developments took some flak from its rivals after it priced its mass market condo Livia in Pasir Ris at an attractive $650 psf on average. But the launch was a huge success - and it has not caused a downward spiral.

Industry players have suggested that the Government step in with demand-boosting measures such as waiving, discounting or deferring stamp duty; resurrecting a fine-tuned version of the deferred payment scheme; and tweaking CPF rules to allow buyers more financing leeway.

Developers themselves have already started absorbing stamp duty and interest for selected projects, and rolled out gimmicks such as renovation allowances and vouchers for electrical appliances.

These measures might help make the buying environment more conducive, but nothing would speak more persuasively to potential buyers than a discount.

In a year when everything is going to go on sale, property developers should consider joining the crowd.