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Price drop unlikely to derail longer-term property outlook

Analysts see little chance of a pullback in cooling measures given liquidity

[SINGAPORE] Even with a potential 10-15 per cent drop in residential prices over the next two years, the longer-term outlook for the property market remains positive. And with global interest rates set to rise only next year, there is no pressing need for the Singapore government to lift its cooling measures now, according to market watchers at the Real Estate Developers' Association of Singapore (Redas) property market update seminar.

"There is no shortage of liquidity now, which is an issue, because everyone is waiting for that 10-15 per cent decline in property prices," said Song Seng Wun, executive director and regional economist at CIMB Research, noting that a lot of liquidity in Asia is now waiting on the sidelines.

This is keeping the government from lifting its cooling measures on the property market before the US Federal Reserve raises interest rates. The Fed hike, however, may come sooner than expected given the recent positive economic data in the US, Mr Song predicted.

For now, developers will have to contend with the double whammy of falling residential prices and rising land costs as a result of a reduction of residential land supply in the second half of the Government Land Sales programme.

Also speaking at the seminar, Chua Yang Liang, head of research for South-east Asia and Singapore at JLL, noted that the government has historically intervened in periods when the property price movement deviates from economic growth by a certain margin. He is expecting the government to step in when the gap between the change in the property price index and GDP growth is wider than two percentage points and deems a 10-15 per cent price correction by 2016 "an acceptable level".

In the absence of any further government intervention, home sale volumes are likely to stay tepid and this market adjustment could be prolonged, Dr Chua said.

Residential prices started to correct only in the third quarter of 2013 after the total debt servicing ratio was introduced, as earlier cooling measures had short-lived impact on residential sales by developers.

"In this environment," said Mr Song, "unless you see a huge external shock that triggers a crisis of confidence, that triggers cashflow problems for businesses and households, the government is quite happy to keep the total debt servicing ratio in place. I don't think that is going to disappear."

"What will happen is that it may be tweaked. And how much it may be tweaked will depend on whether the economy is still generating jobs. Broadly speaking, we are seeing fundamentals still supporting the property market," he added, referring to rising wages and the full employment situation in Singapore.

Meanwhile, the office sector is holding up well with healthy business formations even though businesses are facing a tight labour market and wage inflation, property consultants at the seminar observed.

Toby Dodd, managing director at Cushman & Wakefield, said at the seminar that he expects office rents to rise in 2014 and 2015 and occupancy rates to improve on the back of tight supply of prime grade space in the next two years. He forecast that net demand would exceed 1.5 million square feet by end-2016, underpinned by economic growth and a positive business outlook. While he expressed optimism on the plan to decentralise commercial activities to regional centres outside the city centre, he stressed that it would require the right price offerings and discounts to draw tenants from the CBD to these new commercial clusters.