Boom or bubble?

Property prices appear to be on the rise again, but is the rebound sustainable?

ON A Monday night in the last week of July, commuters taking the train home to the eastern part of Singapore may have witnessed a small commotion at the Tanah Merah MRT station.

It was about 10pm, and a group of about 40 people who had formed a queue beside the station since late afternoon was being told to go home.

Apparently, they were queuing to be first in line when a new condominium - Optima@Tanah Merah - opened its doors for bookings. Except that it was not being launched the morning after, but on Friday morning. They were prepared to stand in line for three whole days to get first dibs.

Representatives from the developer TID, a tie-up between Hong Leong Group and Japan's Mitsui Fudosan, implored the crowd to go home.

'The queue will not be recognised. We will not sell anything until Friday morning,' they said.

The crowd dispersed. But their desperation quickly became the talk of the town, and the clearest symbol yet of how unexpectedly hot the local property market has become.

Elsewhere around the world, many property markets are locked into a downward spiral. But the story is startlingly different in Singapore.

Last month, developers like TID sold a whopping 2,767 units of new private homes, smashing the record of 1,825 units set only in June.

These are numbers that have never been seen in Singapore - not even during the stratospheric heights of the 2007 property boom. In just two months this year, developers have sold 328 more homes than in the whole of last year.

In the midst of this buying frenzy, developers have begun raising their prices. Some have even dared to launch new units at record-high per sq ft (psf) prices.

Indeed, the classic signs of a boom are in place: weekend crowds at showflats, blank cheques handed to agents to secure prime units, and flyers flooding the mailbox of every home.

But this boom is different from the last one because of one very important reason: The 2006-07 boom coincided with a period of rapid economic expansion. Today, house prices are rising in the wake of Singapore's deepest-ever recession, and at a time when the entire global economy is only just starting to recover from the shock of a financial crisis.

This has sparked a debate over whether the property boom is hopelessly out of sync with economic fundamentals.

The Government seems worried, and National Development Minister Mah Bow Tan has already suggested that an element of speculation may be involved in the current boom.

Politically, market watchers say the stakes are higher this time around for the Government, because it is the more accessible suburban projects rather than the posh condominiums that are breaking the records.

With the prospect of ordinary folk potentially getting burnt in a price crash, the million-dollar question is whether the current rebound in the market is a genuine recovery.

Or is it just another unsustainable bubble pumped up by hype?

The answer varies, depending on whom you talk to, of course.

Veteran property developer Kwek Leng Beng, chairman of real estate giant City Developments, thinks the market is not getting too frothy.

'It should not be viewed as over-exuberant or extraordinary, bearing in mind that developers had put on hold many of their launches in 2008,' he said at a recent press conference.

In other words, people could have wanted to buy new homes last year, but there was no supply in view of 2008's lacklustre conditions.

Now that there are more launches in 2009, this pent-up demand for homes is being satisfied all at once, accounting partly for the record sales volume in recent months.

Prices are not unreasonably high, Mr Kwek added, noting that the low- and mid-tier markets have yet to recover since their peaks in 1996.

CBRE Research data shows that me-dian prices of new non-landed homes reached $690 psf in the second quarter, compared with $749 psf at the 1996 peak, though the level surged to $800 psf last month.

Analysts also say that the demand is real, driven by buyers awash with liquidity.

People still have money saved from the bonuses of the boom years, and some may have profited from the stock market rally in April and May.

But investment options are few and far between, with savings interest rates near zero and the stock market now losing some steam.

'After the Lehman Brothers structured products failure, property is also increasingly viewed as a safe investment alternative as its value will not drop to zero,' says Ms Chua Chor Hoon, head of South-east Asia research at property consultancy DTZ.

At the same time, labour market resilience is helping. The job market gloom and doom prevalent at the start of the year has been replaced by guarded optimism as government stimulus spending has halted a large upswing in the number of jobless people.

'No matter how much cash you have, if you think you're going to lose your job in the next six months, you're not going to invest in property,' says Citigroup economist Kit Wei Zheng.

But with the economy looking up and the spectre of job losses fading, many feel there is no better time than now or place to park their money than in bricks and mortar.

After all, some see a bet on the property market as a bet on the long-term growth of Singapore as a global city.

Mr Leong Sze Hian, president of the Society of Financial Service Professionals, points out that 79,000 permanent residents and 21,000 citizens were added to the population last year.

And more will be added in the future as Singapore heads towards its target population of 6.5 million.

The buzz generated by the completion of the integrated resorts could hasten foreigner arrivals, say optimists.

Finally, some analysts note that this buying power in the market is being supported by younger home buyers who are coming up against a tight supply of Housing Board flats. This has the effect of hiking HDB prices and narrowing the price gap between public and private homes.

With home loan rates also near historic lows, cheap funding is another key factor driving the demand - combining with the other factors to make private property a very attractive and affordable proposition.

It is primarily because of these factors that most experts agree there is some real demand that justifies the higher prices and sales volumes in the market.

They say the current market should be seen against the backdrop of a market that was stuck in the doldrums only four or five months ago.

With buyers reluctant to commit, some developers had to slash prices by as much as 30 to 35 per cent early this year to generate interest in their projects.

Still, despite the resale and sub-sale markets moving ahead, experts say there remain a lot more over-optimistic sellers than there are buyers.

A collective sale frenzy, like the one that gripped the property market in 2006 and 2007, is also nowhere in sight.

'What we are seeing is recovery phase activity,' says Associate Professor Sing Tien Foo from the National University of Singapore's real estate department. 'It takes a while for a bubble to build up.'

DTZ's Ms Chua notes: 'A bubble means that prices are rising way too fast relative to GDP (gross domestic product) growth. So far, we have seen only one quarter of rising prices in the property market.'

But while many experts don't see a bubble yet, it doesn't mean that one won't form, and what happens next will be very important.

Property consultant Nicholas Mak expects home prices to reach a plateau, with the lows seen earlier this year unlikely to be repeated.

'Right now, prices may continue to run for a few months before stabilising. Ultimately, the market has to return to market fundamentals,' he says.

The problem is that prices may not take that rational trajectory if buyers get carried away. Property consultants and developers have warned that demand is coming from those who missed out on the 2007 high-end boom.

Eyebrows have already been raised at the sort of prices buyers have been willing to pay for suburban properties.

Units at Centro Residences, which is next to Ang Mo Kio MRT station, sold for between $1,117 psf and $1,228 psf last month, a record for suburban homes in Singapore.

'When there is fear or belief that prices are going to keep rising, and many speculators jump in in the hope of making capital gains over the next few years, prices could be driven up beyond fundamental levels like in 1996 and 2000,' says Ms Chua.

'The future's a sure bet but what's happening right now is beyond our wildest dreams. No one would have predicted the July sales figure,' says Cushman & Wakefield managing director Donald Han.

'We've seen price increases of 15 per cent on average since April. It seems too short, too fast a time... At some stage, prices should stabilise.'

One property expert, who declines to be named, thinks that for this to happen, buyers must do a serious reality check: 'Every round of recovery, we see people getting carried away by the herd instinct. There's a total disconnect with reality. It's momentary madness.'

That is why economists and analysts recommend that home buyers sober up by reminding themselves of some hard economic truths before signing on the dotted line.

One such truth is that how the economy fares over the coming months will be a key indicator of the future of property prices. And on that, the jury is still out.

Although the economy surged 20.7 per cent between April and June compared to the first quarter, Trade and Industry Minister Lim Hng Kiang says it is too early to cheer.

Key markets like the United States and Europe have pulled out of recession but growth is likely to be anaemic for the next few years.

CIMB-GK economist Song Seng Wun says: 'The global slowdown does seem to have stabilised, but a recovery could still be far away.

'And while Asian growth may be holding steady, it may not be as strong as we are used to, as developed economies are not seeing the strong recovery.'

HSR Property Group executive director Eric Cheng points to another cold, hard truth: ample property supply.

There are still 62,350 uncompleted homes in the pipeline, according to Urban Redevelopment Authority data. Slightly less than half have been sold.

In particular, major developers are still holding back their large luxury launches because the foreign funds and investors who bought into the posh homes in districts 9, 10 and 11 have not returned in significant numbers.

'The key is whether the price growth at this recovery stage can be sustained. It remains unclear who will pick up the prime homes,' says Prof Sing.

Many buyers also seem to have ignored the fact that residential rents are still falling.

'But Singapore has never been a yield-driven market like mature markets like Australia and the UK,' concedes Credo Real Estate managing director Karamjit Singh. 'The two key drivers here are owner-occupier demand and sentiment.'

Looking ahead, property commentators forecast a variety of outcomes for the months to come - from another slump to continued buoyancy.

Credo's Mr Singh is looking at the recovery lasting up to 12 months before prices start to moderate as more launch-ready projects come onstream.

More bearish analysts like RBS' Fera Wirawan say a mass market bubble has already formed. In an Aug 13 report, she predicted that the bubble will burst, sending residential prices plummeting by 10 to 20 per cent over the next 12 months.

Then, there is the wild card factor of the Government.

'If queues continue to form and people continue to flip, then we may see some (government) intervention,' says Mr Song.

Property experts say this could mean the re-introduction of outright land sales to boost supply, or the abolishment of the interest absorption scheme that allows buyers to defer paying the bulk of the purchase price until the development is completed.

But they also believe the Government will exercise extreme caution. Mr Song believes policymakers won't want to prick the bubble too early as that may deflate the economy.

But he adds: 'But if you let it simmer and build up, it will also be troublesome when it bursts.'

One expert, who does not wish to be identified, warns that if a crash were to come, 'it may take us all by surprise', just as the recovery did.

The best thing to do, advises Mr Song, is to exercise the same type of 'extreme caution' over the coming 12 months.

He says: 'My take is that this recovery's not going to be simple. Global growth is not going to rebound to the previous pace. We can show a couple of quarters of sharp rebound, but it is likely to slow after that...

'Any bubble could well deflate on its own.'

Source: Straits Times, 22 Aug 2009