http://www.straitstimes.com/archive/...nging-20130803

COMMENTARY

Record home prices should set alarm bells ringing

Prices could invert if a few factors kick in at same time

Published on Aug 03, 2013

By Fiona Chan Senior Economics Correspondent


THIS week, the president of the Real Estate Developers' Association of Singapore declared that the housing market is nearing an "inflection point".

Cooling measures have slowed price rises, and the market faces headwinds such as a looming rise in interest rates, a large supply of new homes, and a slowdown in China's economic growth, said Mr Chia Boon Kuah.

But just a few hours after he spoke, the property market pulled off another record-breaking feat.

A site in Jurong for an executive condominium (EC) - a hybrid of private/public housing sold with Housing Board restrictions but turning private after 10 years - drew a record offer of $418 per sq ft (psf) of gross floor area.

The 16 developers that threw their hats into the ring were undeterred by the two other EC sites up for grabs on the same day, EC buyers' income ceilings, and concerns that some borrowers here are becoming overstretched.

Instead, they focused on the recent sell-out of Jurong condo J Gateway at prices of up to $1,778 psf, a new record for suburban homes - never mind that J Gateway is next to Jurong East MRT station and the new Jem mall, while the EC site is surrounded by empty plots for new developments and nowhere within walking distance of an MRT station.

The top bidders for the EC site, a consortium of smaller developers, clearly have their sights set on breaking records as well.

The units they build will have to sell for close to $900 psf, consultants said. No EC project's average selling price has ever topped $800 psf, noted OrangeTee's head of research Christine Li.

At $900 psf, many units in the new development will likely top $1 million in price. As ECs are limited to buyers with household incomes of no more than $12,000 a month, the units are likely to cost about seven times their buyers' annual income, if not more.

That compares with an average of five times for HDB resale flat buyers and about six times for lower-income buyers of three-room HDB resale flats, according to recent calculations by Standard Chartered economist Edward Lee.

Some may argue Jurong is a special case. The Government has earmarked the Jurong Lake District for a new self-contained regional centre, which should support the area's property values, they say.

And yet the situation in Jurong has been played out in other regions across the island as well.

In April, a site in Tiong Bahru sold for $1,163 psf of gross floor area, the highest ever for a residential government land plot. New units are expected to sell for $2,000 psf, a record for 99-year leasehold city fringe homes.

As long as developers are still buying land at high costs, they are less likely to reduce unit prices extensively, said a report last week by property firm Colliers.

Other factors are also supportive of prices. Recent economic data reflects a fragile United States recovery that is likely to keep short-term rates low to 2015.

New home supply may also not be as forbidding as it looks. Based on units now being built, about 16,000 private homes will be completed on average every year from now until 2016 - 70 per cent more than the 10-year historical average, says Credit Suisse. But going by government data, almost 80 per cent of the private homes and ECs under construction as at end-June this year have already been sold.

Meanwhile, China's slowdown notwithstanding, Singapore's job market stability - perhaps the biggest factor in supporting home demand - seems assured. The economy is near full employment and likely to stay there for a while.

Housing dynamics are also still strong. Speculative buying fell to 4.2 per cent of total sales in the second quarter of this year, the lowest since 2006, while vacancy rates for private homes remain below the historical average.

But if prices are not expected to fall soon, how does this square with Mr Chia's prediction?

Mr Chia didn't elaborate on his comment, but one way of looking at it could be that his forecast of a turning point marks not a change in prices, but in fundamentals.

Not so long ago, buyers baulked at paying above $1,000 psf for suburban condos; if ECs are now nearing that price, alarm bells should ring. Rather than a sign that demand is still buoyant, the Jurong EC site may be a symptom that prices are running too far from basics.

Other signs are emerging that the property cycle is maturing. Prices of detached and semi-detached houses fell in the second quarter for the first time in about a year, while median cash premiums for HDB resale flats have dropped to their lowest in a year.

Rental yields are also dipping as landlords lower their asking rents due to a surge of new homes coming on the market.

So while the actual turning point in prices may not come so soon, entering the market at this juncture - especially at a record price - may be dangerous.

Since 2009, housing prices have risen much faster than economic output, incomes and rentals. The only thing that has kept pace is debt levels, which is funding the growth in home prices.

Suburban homes are likely to be a flashpoint, as investors buying such units have shallower pockets to withstand a softening of the rental market.

Even owner-occupiers - such as those buying ECs - could be caught in a negative equity trap if prices start falling as rates rise.

All it takes for prices to invert is for a few factors to kick in at the same time: a record number of home completions, a hike in interest rates, and a shock to the economy that costs some jobs.

So while prices look to be still in the ascendant, would-be buyers of suburban homes at record prices would do well to heed Mr Chia's prediction of an inflection point. The crunch has yet to come, but that doesn't mean it never will.

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