Friday, November 18, 2011

Private property prices are forecasted to fall 22 - 23%

After all these economic bad news from Europe and Singapore industrial output, which strongly points to a contraction in Q4 2011, where will the property market head to? Daiwa Research forecasts it will go downwards:

"The housing market in Singapore is heading for a prolonged downturn and overall private home prices are forecast to fall between 22 and 26 per cent in the next three years, Daiwa Research said. "We believe the residential property market could remain depressed for several years, triggered initially by a likely forthcoming gross domestic product slowdown (in 2012) and lingering global economic uncertainty," it said.

From late next year, Daiwa said, structural issues such as the rapid build-up in unsold inventory in the primary market and vacant rental units will take centre stage and keep home prices and rents in check for several years."[1]

Daiwa based its prediction on the currently high unsold inventory levels and forecast an influx of new supply that together will flood the market. Already, new housing supply at the end of September hit the highest level since pre-global financial crisis levels at 86,322 units noted Daiwa. It added that just 43 per cent, or 37,114 of these units have been sold.[2]

Actually, only 11,480 of these unsold units are under construction while rest are planned. This as well as near-zero borrowing costs to refinance their operations give flexibility to property developers to "hold" development instead of lowering the prices. But they cannot hold indefinitely since they cannot hold the land they bought empty more than 60 months because of penalties imposed by government for slippage.[2]

Daiwa is the first research house which seems to take the surge in number of completions per year seriously. If you look at the total net completions graph here, you will see what really has been driving the property prices high: an anemic new HDB and private house building pace from 2002 to 2010. These 8 years there were less than 10,000 units of private properties were completed while population was growing with high numbers of immigration. Now completion phase is going back to pre-2002 levels of around 30,000 per year. This simple chart supports what we have written before here: Current price levels are not resulted from a healthy supply - demand balance.

See also Private property prices may fall 30% 2012 onwards.

[1] - Housing market set for prolonged downturn: Daiwa
[2] - Daiwa Downgrades Property Outlook

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