BNP Paribas in a Monday report said that it believes that immigration policies and the incoming private housing supply will make averting further declines in property prices more difficult than is widely thought.
This is against a general consensus that the authorities have enough controls in place to maintain a "desirable slow bleed" in residential prices.
The bank estimates that private property prices could fall a further 10 per cent over the next two years, which in turn could have a negative wealth effect and constrain private consumption growth.
Private property prices have fallen 5.5 per cent from their mid-2013 peak. "A closer look at valuation metrics and underlying drivers suggests the market has further to correct before a bottom can be called," BNP said.
"The consensus view amongst the general public and financial analysts alike appears to be that the government can call an end to the decline in property prices should it wish. The obvious means to do this is to unwind the suite of cooling measures imposed over the last seven years. Many also believe this unwind is likely to follow shortly after the next general election," the bank added.
There has been talk that the elections will be held this year to ride on the current nationalistic mood following the 28th SEA Games and the passing of former prime minister Lee Kuan Yew.
The biggest killer of property demand has been the total debt servicing ratio (TDSR) framework, which limits individuals' total borrowings to no more than 60 per cent of their gross monthly income.
BNP said that this essentially does two things: it limits the capacity of households to buy property, and it supports the long term financial stability so that private consumption growth rather than banks will bear the brunt of a property bust.
BNP said that the government is thus least likely to unwind the TDSR requirements in the face of a prolonged property downturn. This makes TDSR a key impediment to the revival of the property market.
It pointed out that some households may soon find it hard to meet the TDSR requirements, as debt service ratios may rise in tandem with the Fed's monetary tightening, and at a quicker pace than income growth (since rates are rising from a very low base).
This is coupled with tighter immigration policies, which have hurt both foreigner purchases and rentals, and slower regional growth, which has dimmed the incentive for multinationals to expand into Asia.
All this is happening while nearly 24,000 units will be added to the private condominium and apartment stock in 2015. Even if occupancy rates for this fresh supply remain near the historical average of 85 per cent, the vacancy rate will shoot up to 10 per cent at end-2015 - the highest since 2005.
BNP expects "a relatively orderly unwind" though - with household income growth maintained at 5 per cent per annum while housing prices fall 10 per cent over the coming two years. This, it said, will lower the price-to-income ratio from 11 times currently to 8.5 times.
"Such a decline will push up loan-to-value ratios and force households to inject fresh capital into their mortgages when they attempt to refinance, further constraining private consumption in the coming years," it said.
Comparing Singapore and Hong Kong, where both governments have wielded a series of cooling measures, BNP said that the effect of macro-prudential tightening measures on property prices has been more pronounced in Singapore because the city-state has "substantially more" borrowers that need mortgage financing. The result has been a small and gradual deflation in prices.
Conversely, Hong Kong has had "decidedly little success" due to its proximity to China and mainland buyers' preference for cash purchases.
"Property prices remain on a seemingly relentless rise, up 60 per cent on a per square foot basis since 2010. This, in turn, has pushed price-to-income ratios to a new record high of 27 times, (versus) the historical average since 1990 of 16 times," BNP said.
Because house prices in Hong Kong are so linked to mainland capital inflows rather than local leverage, it is difficult to envisage a sustained decline in prices at the moment, it said.