Far Eastern Economic Review
10 July 2003
The steady drop in residential-property prices is creating negative equity.
A collapse in Singapore’s private residential-property market has some economists and homeowners spooked. Residential-property prices have been in decline since the Asian financial crisis, according to a recent HSBC report. With the exception of a minor mini-rally in 2000, private housing prices have dropped 37% since they peaked in the second quarter of 1996.
That’s smaller than Hong Kong’s peak-to-trough collapse of 63%–but the decline in Singapore has had had far-reaching effects because about 90% of all Singaporeans own their own homes compared to 55% in Hong Kong. HSBC forecasts average prices for private housing will decrease by at least 5% this year, following a 2% drop in 2002.
Resale prices for public-sector flats have largely mirrored the private sector, argues the HSBC report’s author, economist Arthur Woo. The bulk of Singapore’s population lives in public-sector housing supplied by the government-run Housing Development Board. Average resale prices for HDB apartments have dropped about 30% since 1996. Says Woo: “It’s hard to imagine there will be an upside for the property market.”
Things aren’t likely to get better until supply and demand come back into balance. In the private residential market, 15,790 private residential properties sat empty in the first quarter of this year–a vacancy rate of about 7.6%. The supply of private housing units to be completed is expected to surge from 4,943 this year to 11,999 in 2004 and 12,493 in 2005, according to figures from the Urban Redevelopment Authority.
About 12,000 HDB flats were empty at the end of last year–translating into a two-year supply, the HSBC report states. “It looks like the type of supply that’s likely to come out in the next few years is tremendous and is almost at pre-crisis levels of 1997,” says Woo. “Developers eventually are going to have to launch these properties. Are the demand factors going to be there? It doesn’t look like it.”
While some people living in HDB flats may “upgrade” and move into pricier private apartments, he argues, those numbers may dwindle as the population ages. “You’ve got empty-nesters who don’t need larger apartments and will need greater retirement funds,” Woo says. He also points out that roughly 20% of the population are foreign workers who rent rather than buy. In addition, more than 5,000 families living in HDB flats “downgraded” to smaller flats last year–up 23% from 2001.
Changes in residential-property prices also typically have an impact on private consumption. Lower housing prices can drive savings rates higher; when property prices fall, fewer owners withdraw equity from their homes to borrow against the increase in value to finance other consumption. “There has been a huge negative wealth effect because people are leveraged into the property market,” Woo says. “Going forward, it just doesn’t seem like things are going to improve.”
At the same time, developers realize that prices are probably not going to revert to where they were in the good old days when they rose 20%-30% per year, some analysts warn. But even if there’s no upturn they’ll have to launch their properties sooner or later, pricing them to sell. If developers are sitting on huge land banks for which they pay hefty holding and interest costs, there’s deterioration on their balance sheets. “When developers acquire a piece of property they don’t hold it and wait for the price to go up,” says Tan Cheng Teng of GK Goh Research in Singapore. “It’s changed from an asset-holding game to a volume or trading game.”
Sharmini Rajasingham, an equity analyst at Goldman Sachs, argues there are several companies with three or four years of supply on their books, and this has become a “millstone.” Developers are unable to monetize those assets and are generating nothing but holding costs, she points out. “It’s okay to hold that much land bank if prices are flat or looking like they’ll appreciate.
But the opposite scenario is happening and prices are falling. If you can’t generate a cash return and there’s no sign the cycle will pick up again, you’re better off if you’ve got a lean land bank and price moderately.”
Winston Liew, a property analyst at Daiwa Institute of Research adds that while prices in the high-end market are still likely to drop another 10%-15% in the next 12-18 months, the low- and mid-end markets–S$350-400 ($201-230) per square foot and S$500-700 per square foot respectively–have bottomed out. “Prices have fallen in that segment, so we’re actually seeing quite healthy demands in that sector of the market,” he argues.
But others aren’t so sanguine.
Even at the low end it’s not clear that prices have bottomed, argues Rajasingham of Goldman Sachs: “Talking about things improving is very premature.” She notes that while it is true that demand is probably moving up slightly, it remains confined to a few projects, and even low-end properties that are attractively priced are not seeing good demand.
This may reflect the fact that HDB dwellers are downsizing their flats to preserve capital, rather than looking to upgrade, she says.
“What we’re seeing is not encouraging. There are a lot of developers needing cash flow because they haven’t had any launches for months and months, and there are a lot of people worried about their jobs who aren’t buying. It’s not a pleasant dynamic, whether it’s low-end, middle-end or high-end.”