Oversupply looming?

There's an insatiable demand for owner-occupied property now, but what happens later?

The spectre of a possible looming oversupply in Singapore's housing market - including both the private and public sectors - in the not-to-distant future was again brought back to the fore when the HDB announced on Wednesday its biggest launch ever of new Build To Order (BTO) flats.

The 2,696 flats offered brings the total number of new BTO flats launched to 8,828 flats for the first six months of this year. This is equivalent to the BTO supply for the whole of last year.

At this rate, the HDB will likely double the number of BTO flats by the end of the year to about 17,000 units.

For the time being, demand for BTO flats appear insatiable. Unlike most purchases of private homes, this is real demand for owner occupation. It is just that rising resale prices and fears of further increases in flat prices drove many to book their flats many years in advance.

The widening price gap between new and resale flats coupled with many more innovative schemes such as the new eco-friendly Waterway Terraces have also added to the attraction of BTO flats.

If we tag these numbers to the robust sales of over 14,000 private homes each in 2007 and last year with a strong possibility that these numbers may yet be matched this year, are we looking at a looming housing oversupply within the next two to three years or even earlier?

The current strong demand for BTO flats is not sustainable. There will come a time when demand will drop off as those wanting to buy would have already secured their flats or have already booked theirs.

The rise in HDB resale flat prices may then plateau off. This may act as a cap on the future number of upgraders to the lower end of the private housing market particularly if private home prices continue to rise.

Do we then depend on foreigners to make up this shortfall? The percentage of foreign and permanent residents buying has certainly gone up in recent months but they are fair weather market participants. They can go as quickly as they come.

While discussing property at a recent business lunch, a few Hong Kong professionals told me laughingly that some of their friends are no longer able to visit Singapore as they are "wanted" people.

It transpired that these friends bought high-end properties in 2007 and chose to walk away when prices turned south.

Will recent buyers walk away again when things do not go their way?

If I were the owner who recently sold off his Sentosa Cove detached house for $36 million, I will put off celebrations until I actually have my hands on the money. Anything can happen between now and sale completion.

The greatest drawback in attacking the real estate bubble from the supply side is that it places a huge strain on the limited industry resources.

Lest we forget, the ramping up of supply in recent months have yet to make a dent in demand. If demand does not abate due to excessive liquidity, what happens then?

With the total number of homes - both private and public - sold having more than double in recent years, is the real estate industry particularly the construction sector able to similarly doubled its capacity.

Let us say we have the labour capacity, what about material costs? Even if we are prepared to pay more, are we able to get them? The problem of sand imports comes quickly to mind.

With such nagging problems, it is possible that we will see the return of ever rising construction costs and project delays.

It was not so long ago that skyrocketing construction prices and the credit crunch led to a indefinite postponement in the development of our Kallang Sports Hub.

It has since been revived but it had better take off quickly before the same problems resurface once again.

The writer is the head of research and consultancy at Chesterton Suntec International.

Source: Today, 2 Jul 2010