Saturday, November 26, 2011

Private property prices may fall 30% 2012 onwards

A few weeks ago, a research house released a forecast that predicts a 22-23% fall in Singapore private property prices. Now Standard Chartered analysts says that the the residential rents as well as private property prices in mass market could fall 30% over the next three years as supply ramps up amid falling demand:

"Standard Chartered sees problems ahead, including slower population growth due to stricter immigration policies and the unprecedented supply of completion of homes coming on-stream" says Esther Teo from The Straits Times[1]

Current mass market private property prices are equilibrium prices between an anemic supply and an artificially low interest rate fueled demand of last 8 years, following the 2001 dot com bubble. You actually do not need to look at any chart or report to figure out that this "price" level is not fair: Just remember that a 1 million dollar flat became mass market condo here in Singapore! The main reason was the ultra low supply, take a look at the chart here and see yourself. What the reporter calls "unprecedented supply" is actually back to normal levels of home production.

Standard Chartered also warns about the interest rate increases after 2013. Interest rates, the price of using someone else's money, are artificially low to force savers to spend for nearly a decade now and they are creating a dangerous illusion of affordability. Even with these rock-bottom interest rates, private home buyers in Singapore are estimated to spend more than 38 per cent of their monthly gross income on mortgage payments which is higher than the Singapore Government's target of 30 per cent to 34 per cent.

Standard Chartered property analyst says "if interest rates normalize to 10 years average of 4 per cent, we estimate the proportion of income spent on mortgage repayments to rise to 50 per cent". In fact, interest rates need to hike well above 4 per cent to bring up the average to 4 per cent, which is very likely after an artificial low interest rate period. Interest rates are quite powerful to dampen property demand as we have seen in Hong Kong and China. No other cooling measures combined worked to bring down the property prices in these 2 countries but just increasing the interest rates (or shrinking the money supply) started to bring down the prices. This is because, I guess, many investors loose desire to invest in property when cash flow of rent minus mortgage payment goes to negative levels.

[1] - Will Singapore Property market soften?

See also:
This blog article is to provide general information only and should not be treated as an invitation to buy or sell any property or as sales material.  Users of this report should consider this report as a one of the many factors in making their investment decision. Users should make reference to other sources of information and specific investment advice to obtain a more objective view of the property market. Asia Singapore shall not be responsible for losses suffered.

No comments:

Post a Comment