When will private housing prices correct?

Not for the time being, but the expected decline in HDB resale prices may cause investors to think twice

05:55 AM Sep 17, 2010
by Colin Tan

Since the announcement of the property market cooling measures late last month, I have been frequently asked the question: When can we expect private housing prices to correct?

We have had two weekends and at least one major developers' preview of a condominium project in Pasir Ris to gauge the effectiveness of the new measures.

New ownership rules for the purchase of Housing and Development Board resale flats and the penalties for breaching them have also been pretty much fleshed out, providing more clarity to investors.

The penalties include jail terms of up to six months, fines of up to as much as $5,000, as well as the compulsory acquisition of the flat if the breach is discovered after the sale.

To recap, anyone who buys an HDB resale flat on or after Aug 30 must sell their private property - owned here or offshore - within six months. And they will not be allowed to buy a private property here or overseas until they have met the minimum occupation period of five years.

Overall, the cooling measures have been well received although one might have thought differently, given the amount of media space devoted to a very vocal and rightfully aggrieved minority. But the rules are meant to protect the system as well as to solve an acute shortage of HDB resale flats for deserving households. Fairness has got nothing to do with it. You cannot possibly be fair to everyone when rules are changed mid-stream.

The 70-per-cent loan cap on second mortgages and the increase in the cash downpayment to 10 per cent have significantly reduced the impact of speculators and the most daring of investors.

Most ordinary investors are actually happy as they now have more than a reasonable chance of getting a piece of the action. The unusually high launch prices achieved for some projects such as The Scala may be a thing of the past, at least for the current phase.

This is because we cannot assume that the quantum of liquidity in the system is constant. It is a global problem and the market dynamics may yet change when fresh funds flow into Singapore.

The only major condominium project on sale following the announcement of the cooling measures, NV Residences, was well received. Many attributed the response to the project's good location and reasonable pricing.

Although the average pricing of about $830 per sq ft appears reasonable compared to projects elsewhere, it actually sets a new benchmark for the Pasir Ris area. One can argue that prices could have been higher if not for the measures. I agree.

The good take-up showed that there was still lots of liquidity in the market. It was reported that 80 per cent of buyers were locals. Some visitors present at the showflat assessed the overwhelming majority of buyers to be investors. Quite a few were multiple home owners. This is a worry.

A fourth set of cooling measures or possibly even a fifth, given the calibrated approach taken, may be needed to tame the liquidity problem.

The unfolding events indicate there is still a market out there for the taking so long as projects can show or are perceived to give value for money. Investors remain keen but need a reason to buy. These are not signs of a weakening market. It will be wishful thinking on anyone's part to think prices will correct anytime soon.

But the penalties for breaching HDB resale ownership rules are pretty draconian. Any investment product which sees its triple A rating downgraded to Bs will experience that inevitable price correction. The HDB resale flat is no different.

How much of an impact the new rules have will depend on how large the investment demand for resale flats was or how weak the fresh supply over the next few years will be.

A declining HDB resale market, if it happens, will strike an important psychological blow to the private housing market. At the moment, most investors find it inconceivable or unimaginable for private property prices to decline.

It may cause some buyers to think twice - price corrections can and do happen, however impossible it may seem. No lesson is better learnt than when the value of a property starts to decline before your eyes, even if it is just a paper loss.

The writer is Head, Research and Consultancy at Chesterton Suntec International.

Source: http://www.todayonline.com