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Too early to roll back cooling measures

Cut in state land sales, Fed stance on low interest rates could mean private home prices more likely to rise

THE Ministry of National Development's decision to cut state land sales for private housing development for the first half of next year reflects official caution about an oversupply building up. Not only has MND chopped supply on both the confirmed and reserve lists but it will be pushing out mostly not-so-hot sites on the confirmed list to prevent benchmark bids from being set and hence pushing up prices of other sites.

The industry is bracing itself for record numbers of private housing completions. And with the introduction of the total debt servicing ratio (TDSR) framework in late June, developers' private housing sales have, on the whole, slowed. CBRE estimates that 2013 will end with around 15,000 units (excluding executive condominiums) sold - down from last year's record of 22,197. Next year, the figure is likely to shrink further to 10,000-12,000.

With sales down, some developers have started trimming prices. The goal is to launch projects as soon as possible - on fears of worsening sentiment as a housing glut builds up. In the public housing market too, prices of HDB resale flats have begun to soften. If the trend continues, that will clip HDB flat owners' capacity to upgrade to a mass-market private condo.

Against this backdrop, there have been suggestions from some quarters that the government may begin to roll back some of the property cooling measures in 2014. However, that may be overlooking some factors that could potentially spark a resurgence in private residential property prices.

Firstly, there is no sign that the price of land - the most vital factor of production in property development - is coming down. New market entrants and even some local players hungry for replacement land have been stoking up land bids at government land sale (GLS) tenders. If developers pay higher land prices, they will obviously do their best to sell the projects at higher prices.

No doubt, MND will be launching mostly "inferior" sites on the confirmed list of the first-half 2014 GLS Programme, but there are many plum ones on the reserve list that may be triggered and which could result in benchmark prices being set at tender.

Savills Singapore research head Alan Cheong highlights that three projects that have done well post-TDSR due to relatively attractive pricing - The Inflora in Upper Changi, The Tembusu in Tampines Road, and Duo in Ophir Road - are coming up on sites that have low historical land cost. These will be exceptions.

Most developers have paid top dollar for mass-market condo sites at state tenders and would be loath to price projects below market as this could entail a loss.

Another reason prices will be sticky going south is that developers mostly have strong financial reserves. Mr Cheong argues that by now, they have probably realised that they can afford to hold prices of mass-market and mid-tier projects, and still finish developing and selling them out within the five-year timeline from the date of award of the site (to qualify for upfront remission of the 15 per cent additional buyer's stamp duty or ABSD).

"If project sales simmer down - after the initial launch hype - to a rate of 2-2.5 per cent of the number of units in a development per month, developers will still be able to sell out their inventory over a reasonable time without resorting to price cuts," Mr Cheong said.

He based his prognosis on monthly sales patterns of projects launched following the introduction of TDSR.

In any case, developers may be constrained from slashing prices because of covenants stipulated by lenders in their project financing agreements.

As for the HDB market, the government has already stated that it will begin tapering supply of new build-to-order (BTO) flats from next year. That should mitigate a potential glut and downward price pressure on the HDB resale market. In turn, this should provide stable support for mass-market private condos.

On the demand side, sentiment towards real estate is likely to improve following the United States Federal Reserve's recent pronouncement that short-term interest rates will stay near-zero for a longer time.

Taking into account all these factors, along with the cut in the H1 2014 GLS Programme, one could argue that there is a higher likelihood of prices going up than plunging. Of course, there may be some unknown factor(s) that could rock confidence in Singapore's property market. If that happens, price cuts may no longer be met with buyers quickly mopping up supply.

For now, however, it may be a little early to roll back the property cooling measures.