Property price surge 'cannot go on forever'

[Musicwhiz]

Somehow I don't have much confidence that runaway prices can be tamed. So far, the Govt has tried close to everything and yet people are snapping up properties left, right and centre! Singapore really has too many cash rich people.

Business Times - 10 Jun 2011

Property price surge 'cannot go on forever'

Khaw Boon Wan addresses issue close to heart of S'poreans as H2 land sales programme is released

By UMA SHANKARI

(SINGAPORE) Determined to tame the runaway property market, the government will sell vast chunks of land this year on which private homes can be built in record numbers.

The idea is to quell the fears of those who see their Singapore Dream slipping away, said National Development Minister Khaw Boon Wan.

He also highlighted that 'sharp property price increases cannot go on forever'. 'We have always recognised that unsustainable, rapid price increase brings with it enormous risks and that got us to act earlier on,' he said in his latest blog entry. 'While sharp rises are painful, sharp declines are just as disastrous.'

In particular, Mr Khaw said Singaporeans must be mindful of the dangers of oversupply - especially if foreign buying eased.

For now, it's all systems go: the government will sell new land for at least 17,510 private homes and executive condo units in 2011 - a sharp increase from 2010, when land for a then-record 13,945 new homes was sold to developers.

The Ministry of National Development (MND), which released the government land sales (GLS) programme for the second half of 2011 yesterday, plans to release 43 residential, commercial and hotel sites over the next six months.

Out of these 43 sites, 19 will be on the confirmed list, while 24 will be on the reserve list.

To address the strong demand from homebuyers and developers, 17 out of the 19 land parcels on the confirmed list will be for residential use. These 17 sites will yield 8,115 new private homes and executive condominium (EC) units.

The new supply comes on top of the land supply for 9,395 private homes and ECs that will be sold in the first half of the 2011 programme.

Even more homes may be built if any of the 13 residential sites on the reserve list - which can together yield about 6,100 homes - are triggered and sold.

Mr Khaw said that a sharply rising property market 'upsets and frightens many' and so MND has to confront the issue 'head-on'.

'Young people aspiring for the Singapore Dream get angry to see the dream seemingly slipping away. Their parents worry for them and get into panic. We have to confront this issue head-on,' Mr Khaw said.

But while MND will inject another bumper supply of residential land into the market, it will also watch out for possible pitfalls in the medium term - such as oversupply.

'Together with committed investments, some 53,000 units will be looking for buyers over the next couple of years or so. That is not a trivial number,' said Mr Khaw.

The 53,000 figure includes sites from the confirmed list of the H2 2011 GLS programme, potential supply from recently sold GLS sites, and some 34,270 unsold private homes from projects that are already under construction, as well as those projects that have been granted planning approval but are not being built yet.

In particular, Mr Khaw said that demand from foreigners can drop off sharply if external situations worsen. 'Foreign buyers . . . have been strong. In the recent quarter, they made up 16 per cent of all buyers of these private properties. Many Singaporeans also buy properties with the intention to rent them to foreigners coming here to live or work. In the event of any external shock, both foreign demand and rental demand can fall quite quickly. The impact can be serious if the drop in demand happens at a time when there is a substantial increase in supply,' he said.

In addition, interest rates will not remain low forever, he said: 'Cost of borrowing and repayment must go up and households must factor this in.'

Analysts noted that the H2 2011 GLS programme tries to balance the steady demand for housing - which is pushing prices up - against the risk of flooding the market.

Bank of America Merrill Lynch economist Chua Hak Bin noted that the supply of potential homes in the H2 2011 GLS programme remains similar to what was released in the last programme - despite slower property price increases and slowing economic growth.

Private home prices rose 2.2 per cent in Q1 this year after climbing 17.6 per cent in 2010. 'It (the second half 2011 GLS programme) should help put a cap on the risk of a housing bubble,' Dr Chua said.

Chia Siew Chuin, Colliers International's director of research & advisory, said it is evident that the residential property market remains the government's top concern right now.

In all, the second half GLS programme will supply 14,195 homes from both the confirmed and reserve lists, as well as 2.88 million square feet of commercial space and 3,750 hotel rooms. Analysts also noted that changing policy risk will continue to weigh on real estate stocks over the near term.

[kazukirai]

The minister has spoken!
"Caveat emptor," he says.

By the way, would like to ask fellow buddies for their comments. In the event of a property market slowdown/dip and rising rates:

- What is the impact on Banks and Property Investors should the value of the collateral (i.e. the property on which the mortgage is taken) now decrease in value?

Do banks call for an increase in collateral pledged? Do banks amend the rates to account for the fact that the Loan-To-Valuation ratio has now sharply increased?

Just trying to understand the likely drivers of a negative feedback loop on the system in the event a property market slowdown occurs (which seems very likely in the present environment).

[freedom]

for personal mortgage, as long as payment is made on time, everything should be fine.

[karlmarx]

interests rates are under the terms contracted and the banks can't change them. unless the client chose a float rate package (sibor, sor) which moves in tandem to market (U.S.) interest rates. in the event of a market crash, it is likely that interest rates will be lowered to stimulate recovery. but of course, it is possible by the time singapore property has crashed, the U.S. may have recovered and raised their interest rates. double whammy. more defaults on installments. it's possible because not all economies crash at the same time. if you recall, U.S. was doing fine when sars struck and singapore property dived. interest rates were in the 3% range then.

like your margin trading account, banks will ask for cash top--up on your loan when the value of your property falls. so you can imagine how this may lead to forced selling. properties that default are seized and auctioned off by the banks. prices of auctioned properties may be heavily discounted, depending on sentiment, since banks do not like to have real estate exposure on their balance sheet and will offload them asap to the highest bidder.

the magnitude of a price collapse also depends on the banks' lending policies. the u.s. banks are holding many properties on their balance sheet due to defaults. the more they offload into the market, the more the price will dive, which would then hurt the remaining properties on their balance sheet. homes prices in u.s. has not recovered because of the huge supply of foreclosed homes held by banks, that are waiting to come onto the market. all this is the result of the banks (and fed) easy lending policies. the question to ask is if local banks have been as lax in their underwriting of loans. how much of their loan portfolio is in sg real estate?

the hardest hit will probably be the property investors (not developers). asset values will be impaired, rentals will fall (or none if your tenant leaves), banks will make cash call. since most property investors are somewhat leveraged, you can imagine how painful it'll be for them.

but it should be worth noting that singapore's property market is small, and thus easily manipulated. the top 20% are flushed with cash (and cashflow) and will have no problem riding out a downturn, most of them anyway. all we have to do is open the door to more migrants to cure the demand problem. the ones who will be selling will be those whose asset is mainly in properties; the mass market and hdb upgraders. all in all, a steep (>50% devaluation) and prolonged (2-3 yrs) property market downturn is unlikely.

[Jacmar]

like your margin trading account, banks will ask for cash top--up on your loan when the value of your property falls. so you can imagine how this may lead to forced selling. properties that default are seized and auctioned off by the banks. prices of auctioned properties may be heavily discounted, depending on sentiment, since banks do not like to have real estate exposure on their balance sheet and will offload them asap to the highest bidder.

the magnitude of a price collapse also depends on the banks' lending policies. the u.s. banks are holding many properties on their balance sheet due to defaults. the more they offload into the market, the more the price will dive, which would then hurt the remaining properties on their balance sheet.

homes prices in u.s. has not recovered because of the huge supply of foreclosed homes held by banks, that are waiting to come onto the market. all this is the result of the banks (and fed) easy lending policies.

Actually what you said above is not quite correct. During the last financial crisis and property crash of late nineties many homes in singapore and HK went into negative equity. this means even if the bank sold off your home it is still not enough to cover the mortgage outstanding. the banks did not ask mortgagers to top up(even it has fallen into negative equity) as long as they can service their mortgage. if they cannot service then the bank will call them up to re-schedule the payment...stretch it. banks don't want to pull in all those mortgages and have many properties to dispose off unless it is force to.

US mortgages is also different from Sgp mortgages. In US, owners can walk away from a mortgage once it has gone into negative and without suffering a recourse. In sgp you cannot and the banks will pursue you till you go into bankruptcy. so unless you want to go into bankruptcy you don't want to go into default. This is why US banks has so many foreclosed home on their hands.

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Somehow I don't have much confidence that runaway prices can be tamed. So far, the Govt has tried close to everything and yet people are snapping up properties left, right and centre! Singapore really has too many cash rich people.

You know what they say about bull markets. It pulls in the non believers when it has reaches the late stage of the bull cycle. So it looks like not to far off now before it corrects.

[freedom]

I think the way the mortgage is handled in SG is quite unfair to consumers.....

[sgd]

Land release is only the "icing on the cake"

what about interest rates? Once interest rates start hiking we'll see if this property bull still has any legs left at all and those who had earlier opnion that "this time is different" lets see if they still feel the same way.

[kazukirai]

Thanks Karl and Jac for your views.

[tonylim]

My cousin is a conveyancing lawyer, she told me many senior CSs sold their 2nd or 3th proerties recently. They should know better than many man in the street.

[dydx]

We just have to look at what has happened in the U.S. during the last 5 years to appreciate the massive destruction in the aftermath of a runaway real estate market. So many ordinary individuals/families and property investors - developers, and even institutions run by investment professionals, etc. - have been hurt badly and destroyed. The destructive power resuled from the collapse of the U.S. real estate market has proven to bankrupt even commercial and investment banks, private credit insurers, Freddie Mac and Fannie Mae, and other credit/investment institutions, which all operated with substantial equity capital as cushion and under prudential risk-taking policies and government supervision. As a last resort, only a U.S. government financial bailout could save the day! Until now, despite the historical low interest rates for close to 3 years now, the overall U.S. real estate market - in terms of average price level and transaction volume - has remained in a very depressed state, i.e. most participants in it and the financiers involved are still licking their wounds. And even the U.S. government couldn't do much more to help it!

Indeed, a free real estate market, supported by a prolonged low interest rates envionment, generous and innovative bank lending, the availability of tapping capital and debt funding from the capital markets, government policies encouraging private home ownership and investment in real estate by the masses, can become a beast that is very difficult to tame and control!