■ A combination of weakening regional growth prospects, macro-prudential tightening and a sizeable supply-demand imbalance has taken the steam out of Singapore’s property market.
■ General consensus appears to be that authorities have sufficient control over the property market to maintain the existing desirable slow bleed in residential prices.
■ However, immigration policies, incoming supply and valuations lead us to believe averting further declines may be more difficult than is widely thought.
■ In an orderly scenario, we estimate private property prices could fall a further 10% from current levels over the next two years, with direct consequences for consumption growth.
Prolonged use of ultra-loose global monetary policy is widely believed to have spurred property bubbles in the Asian city-states of Singapore and Hong Kong. In both places, the authorities have repeatedly imposed “cooling measures” to restrain investor enthusiasm and ensure housing remains affordable for the local population. However, the efficacy of these measures depended greatly on circumstances surrounding their respective property booms.
Due to its close proximity to China and anecdotal evidence that mainland buyers prefer cash purchases, the Hong Kong authorities have had decidedly little success (Chart 1). Property prices remain on a seemingly relentless rise, up 60% on a per square foot basis since 2010. This, in turn, has pushed price-to-income ratios to a new record high of 27 times, roughly 2.5 standard deviations above the historical average since 1990 of 16 times. With house price inflation predominantly a function of mainland inflows, rather than local leverage, it is difficult to envisage a sustained decline in prices at the current juncture.
In contrast, Singapore has substantially more borrowers that require mortgage financing. This has ensured macro-prudential tightening measures have been more effective (Chart 2). As a consequence private property prices have fallen 5.5% from their mid-2013 peak, with the combination of proactive monetary policy and consistently strong household income growth fostering a smaller and more gradual deflation than that of the late 1990s. However, a closer look at valuation metrics and underlying drivers suggests the market has further to correct before a bottom can be called.
The consensus view amongst the general public and financial analysts alike appears to be that the government can call an end to the decline in property prices should it wish. The obvious means to do this is to unwind the suite of cooling measures imposed over the last 7 years. Many also believe this unwind is likely to follow shortly after the next general election. Yet, Singapore’s own experience shows it is harder to stoke demand amid a challenging economic environment than to restrain it during boom times. (Read Report)
Source : BNP Paribas