Updated: Sep 5, 2020
Picking off where i last left off, many readers have privately messaged me after reading Part 1 of this article (Factoring in COVID-19, Is There An Oversupply Risk & How's The Market Situation? (Part 1)) and asking about my views on how this will all pan out in the long run.
1st, thank you for following my thoughts and reading my blog. It is gratifying to hear from all of you and your opinions as well.
It is important that i remind everyone that my insights are like crystal ball gazing into the future.
I make no apologies that my opinions are as likely to be right as it is to be wrong as we move into uncharted waters; but my best educated guess relies not on my vested interests as a real estate professional but on my many years of studying market trends, human behavior in up and down markets and most importantly, government behavioral patterns.
I'm an avid analyst fueled by a curious mind always searching for macro and micro data points and explanations that drive market movements.
With the daily negative news outweighing positive ones, you can bet that fear is currently the order of the day and sold to everyone consuming any form of media.
It is hence crucial that we pay attention to market fundamentals to avoid being paralyzed by fear and missing out on opportunities in a crisis.
So with that, take a ride with me to recap key nuances of the market situation and how I see it unfold IF the COVID-19 crisis were to resolve itself in the next few months.
Developers are calling for easing of curbs. Why?
As covered in the previous article, most developers have up to 2022 to 2023 to completely sell out their projects. That's a good 2 - 3 years of time left.
However, over the course of last year, there were multiple calls by developers to ease property curbs especially the 5 years ABSD remission timeline for building and selling projects which otherwise would see them slapped with additional costs for their developments.
There were some quarters too that called for a longer time frame for larger projects with thousands of units.
Despite sales volume being at a pretty healthy level of 9000-ish or so, developers were "negotiating" with the government for more time to sell citing supply glut concerns.
So what's actually happening?
To find out why, my question is simply, who benefits the most when curbs are eased?
Is it the buyer or the seller?
No doubt, that with recent competition and aggressive land bidding by new players, mostly from China, many local developers have had to trim their profit margins from the highs of 20-30% in the past, to much lower 10-15% profit margins today.
And with the curbs adding more pressure to them having to clear stock fast, they aren't in a very comfortable position with the countdown clock constantly ticking in their ears.
But who really benefits if curbs are eased?
Would developers be kind enough to keep prices low when they have alot less pressure on their books or would they keep prices higher with the breathing room they now get?
You have the answer.
Naturally, as business people, negotiation and bargaining are part and parcel and at every juncture possible, developers must fight for their interests. After all, real estate development is a for profit business.
Maximizing profit margins after a hard fought tender to win a piece of land is only wise.
But of course, our ministers aren't buying it as well.
On Feb 7 2020, the Ministry gave some leeway for "substantially Singaporean firms" for Qualifying Certificate rulings to help local firms cushion the impact of the punitive ABSD/QC regimes that prevents land hoarding. (www.businesstimes.com.sg/real-estate/new-rules-on-qualifying-cert-offer-reprieve-to-singapore-developers)
But nothing changed on the ABSD front as what the government wants to see is the self-regulating mechanism of the market; where developers price according to what the market would buy at.
If ABSD were to be extended, certainly buyers would get the shorter end of the stick.
Can we expect a V-Shaped or sudden recovery?
Take a look at this graph below that showcases the past and future supply of private non-landed homes.
1st, take a look at our completed supply figures for 2020-2023.
The dotted line denotes the past 10 years of average completed supply of 13855 units. Clearly, there's a supply shortfall of ready homes in 2020 and 2021 which is likely to spill over into 2022.
What we are witnessing are the effects from the dearth of enbloc sales in the years 2015-2016 which has resulted in much lower completion of units from 2019-2021.
In 2015-2016, when completed homes supply outweighed the 10 years average significantly, we saw that prices did not correct by much.
However, between 2017 and 2019 when completed supply dipped to 3806-16,186 units per annum, we saw how prices started appreciating significantly.
This pattern was set to carry on in 2020 before the COVID-19 set in and was almost certain to fuel new heights of buying volume this year.
So, if we were to project further into the future, what can we expect?
With constructions taking a good 3-4 years to complete, most of the enbloc and GLS supply (With planning permissions) will see completions happen in 2022-2023.
This means that in the years 2024 and beyond, we are currently not expecting much supply completions which is kind of a repeat of 2019-2021 where prices have and are facing much upwards pressure sans COVID-19's black swan effect.
Can we then reasonably expect developers (especially those who have not accumulated much land bank in 2017/18) to start their land banking initiatives between 2021-2022?
If so, what we can foretell is possibly the next enbloc wave. It might be sooner than most people expect.
How then would property prices in general move in an enbloc frenzy market?
Up or down?
Most definitely in such cases, demand would outweigh supply and heightened displacements of people and windfalls of wealth would push prices upwards.
Are we likely to see resale and new launch property prices moving up?
To answer this, let's take a look at the potential number of buyers entering the market in the coming years.
The past 10 years have seen an annual average of 10,000 HDB flats reaching it's minimum occupation period and owners upgrading as a result.
With the boost in BTO supply back in 2012-4, what we are witnessing now is 3 times the usual upgrader numbers searching for a private home to upgrade to.
While not all HDB owners sell immediately upon MOP, many of them do and this report by Morgan Stanley Research shows that HDB upgraders form 46% of private home sales; hence soaking up alot of private home supply.
Bearing in mind too that the HDB resale market has seen prices declining steadily since 2013 post cooling measures, the government has since provided a much needed stimulus into the heartlands by announcing higher grants for the majority of Singaporeans who have their wealth tied up in their flats.
How can we expect resale HDB prices to move now that many more buyers have additional "Ang bao" money to pay to sellers?
Since the announcements in Sept 2019, we have seen HDB prices move up encouragingly over the last quarter of 2019 and early 2020.
These sellers are also the same buyers who now have more funds to enter the private market, spinning the wheels of consumption that is vital to the economic system.
Let's also not forget that in the same announcement, HDB announced higher income ceilings for BTO and Excecutive Condo buyers.
What does that mean for the future then?
Very simple. With higher earning buyers eligible for BTOs and Executive Condos, we will see prices for these 2 categories of properties increasing.
ECs used to be priced alot lower as the household income ceiling was a mere $12,000. When it was raised to $14,000, look what happened?
New highs were transacted at ECs crossing the $1000psf mark for the first time at Piermont Grand as developers bidded more aggressively knowing that they could sell it to a higher income earner now.
Now at $16,000 household income levels, is it possible anymore for prices to fall below $1000psf for ECs?
I'm afraid not. This new price point is likely here to stay.
Will BTOs then be wayyyy cheaper because there's no private developer involved?
The answer is likely no as the government will price it at a certain fraction of what increasingly expensive resale HDB flats are going to be sold for as a result of the stimulus above.
What does all this mean for private property prices then if BTO, resale flats and ECs are getting pricier with what i mentioned above?
You can guess it.
The market is made up of a series of connecting dots. Dots that when joined together can tell a story of what the invisible hands at work are engineering.
In Part 3 of this series, i will discuss what signals the media, financial institutions and powers of the day have been telling us and why prices have likely bottomed out and will continue rising in the next few years.
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Stuart Chng is a Senior Associate Executive Director of OrangeTee & Tie, and a renowned leader and personality in the real estate industry.
He adores music and can play a few instruments decently without upsetting his neighbours. When not doing so, he enjoys pillow fighting with his son and coming up with silly puns which barely amuses his wife.
Professionally, he is a licensed real estate agent, investor, team leader, speaker and columnist for several property newsletters and blogs and is often quoted in media interviews on 938FM, Channel 8, PropertyReport, PropertyGuru and other publications. Throughout his career, he has helped many clients grow their wealth through selecting great property investments and managing their portfolios actively. Read his clients' reviews here.