An increase in property price index between 5-8% could tip property market into ‘bubble territory’: DBS


As the Singapore property market maintains its upward trajectory in 4Q2020 despite the country entering the worst recession in 20 years, DBS Group Research analysts Derek Tan, Rachel Tan, Dale Lai and Geraldine Wong has identified four factors that may have contributed to the segment’s robust performance.
See: Singapore may act to stall rising home prices: analysts
In 2020, as the Covid-19 pandemic negatively impacted the economy, the property market remained more than resilient with some 10,000 units sold during the year, marking a 5% expansion y-o-y, along with a 2.2% price growth y-o-y.
Flash estimates for the Singapore property price index (PPI) in 4Q2020 point to a 2.1% y-o-y rise during the quarter.
Normanton Park had a strong showing at its launch, registering pre-sales of close to a third of a total of 1,827 units on offer.

This has led Deputy Prime Minister Heng Swee Keat, who is also the finance minister, as well as Minister for National Development, Desmond Lim, to highlight that the government is monitoring the property market closely. The government has also emphasised that it would like to ensure that the property market “remains stable” to enable young Singaporeans to “own their homes and fulfil their aspirations”.
To the analysts, the growth is likely to be attributable to the number of former en-bloc households in the 2016 to 1H2018 cycle returning to the market.
Buyer confidence has also remained, as most Singaporeans have held on to their jobs during to the various job schemes by the government, they note.
Another reason could be the timing as upgraders are purchasing new homes once the minimum occupation period (MOP) on their first homes have ended.
Lastly, low interest rates and ample liquidity could be yet another factor contributing to the upward trend.
“This trend has surprised many (including us) and a further acceleration in price trends in 2021 may put the property market in frothy territory,” they write in a Jan 19 flash note.
The appeal of the Singapore property market may have been further enhanced internationally given that the government has effectively curbed community spread of Covid-19.
“This, in our view, projects the Singapore property as a ‘safe haven’ to foreigners, supported by world class health facilities. While sales volumes in 2020 have not been driven by foreigner purchases, we do not rule out that this trend will resume once travel (business and leisure travel) restarts,” they add.

Policy measures
On the government’s stance, the analysts believe that the policy response is likely to be “pre-emptive” instead of “reactive” to prevent property prices from further rising in 2021.
This comes on the back of an extended period of low interest rates, which has driven mortgage rates lower.
“While a steady 2-3% annual increase in the PPI, in line with household income growth, is well supported by fundamentals, an acceleration in excess of 5.0% (or up to 8.0% in 2021 according to some market commentators) will tip the market into “bubble territory” in our view,” warn the analysts. “This will further pressure household affordability ratios going forward.”
The analysts also note that there has been a reduction in average home sizes, especially for private apartments, while prices psf have remained high.
Which means that the trend will see upgraders will continue to “trade-up” their lifestyles to smaller homes.
However, considering the spaces, the analysts have also questioned how a household can live, work and play comfortably within the smaller area. With working from home being the new normal post-Covid-19, workers may need more space to factor in the new arrangements as well.
Given this, the analysts note that bigger apartments may begin to be out of reach for the median household.

“A possible tweak, in our view, could be an upward adjustment in the average minimum home size in new developments. This would result in developers re-thinking land bids and temper further price increases,” they say.
To add, the analysts suggest that a further adjustment in the additional buyer stamp duty (ABSD), especially for investors and foreigners, as well as the further shortening of mortgage tenures or loan to values (LTVs) for second homes and beyond could help slow the pace of price increases.
On developers’ share prices, the analysts foresee that listed developers such as CapitaLand Limited, City Developments Limited (CDL) and UOL Limited have typically traded closely to the property price indices and that the government’s stance to tighten policies may remain a “general overhang” for the developers, especially in the near-term.
“That said, the listed developers have been prudent in their land-banking strategy and have sold a good portion (60%-70%) of their unsold residential inventory on their books. The pivot towards real estate sectors that generate more recurring income (hospitality, commercial and industrial) in the past few years could imply that the financial impact of any potential policy tweaks has been mitigated,” they say.
Shares in CapitaLand Limited, CDL and UOL Limited closed at $3.46, $7.71 and $7.83 respectively on Jan 19.

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