Friday, May 21, 2010

Beware the liquidity beast

While the announcement on Monday that developers sold 2,207 housing units last month did not shock, it certainly caused a huge surprise.

The total was the second-highest number achieved since records began being kept from June 2007 onwards.

A closer analysis of the figures has shown that prices have continued to inch up.

The highest monthly sales figure of 2,772 was achieved in July last year. The Government introduced its first set of cooling measures soon after that, in mid September, and it did so again in February, after another spike in sales in January.

Will we be seeing a third set soon?

The usual comments were made following the disclosure of the sales figure: That demand at this rate was not sustainable and should ease for the rest of the year. I recall that this warning was given about six months ago and that we have been saying the same almost every month since.

Before the release of the recent figures on Monday, two tenders for private housing sites closed within a week of each other.

The results were notable for the good participation rate from developers – 14 bidders for the Boon Lay site and 18 for the Simei Street 3 site – and the high prices achieved. The estimated selling prices of both projects add to the spectre of continued price rises for the foreseeable future.

Will the authorities redouble their efforts to ensure that there is enough supply to meet the high demand for sites as indicated earlier? Can we expect another slate of sites to be offered soon?

What these two events showed is that there is still ample liquidity in the market. If we assume that developers take a 50 per cent loan for their sites, there is still a huge pile of about $1.5 billion left over from the 13 unsuccessful bidders for the Boon Lay site and another $1.1 billion from the 17 unsuccessful bidders for the Simei site.

While there were a few repeat bidders, these were for the sites alone. We have not considered construction and other development costs or even tenders for public housing sites yet.

How can this liquidity beast be tamed? I termed it a beast because, if left unchecked, it can lead to the ruin of many in the market.

Let’s consider the situation in China. It has raised mortgage rates, property taxes, restricted households to a single purchase, requested banks not to finance purchases beyond the second property and introduced a host of other measures.

Despite the controls, property prices in 70 cities rose last month by an average 12.8 per cent from a year earlier, higher than the annual 11.7 per cent increase in March and the fastest pace since the Statistics Bureau began to put out monthly figures in July 2005. However, there were news reports towards the end of last month that Chinese property prices had stopped rising and that transaction volumes had dwindled.

The question is: Was it because of the measures? Or was it because of the economic storm clouds over Europe stemming from the Greek crisis and the subsequent plunge in the share markets?

I would say it is the latter. As such, once the Greek crisis passes, expect the buying to continue. If not, touch wood, the worldwide economic repercussions will ensure that the day of reckoning for the property markets throughout Asia come sooner rather than later.

In Singapore, the authorities may continue with their recent accelerated pace of releasing sites but up to a point enough becomes too much, even if developers continue to splurge on sites. Excessive liquidity distorts rational decision-making.

The policy focus has to shift back to the demand side but if China has so much difficulty taming its own property market, how much more will it take to tame our own liquidity beast considering that we have not really started?

Source: Today, 21 May 2010

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