Introduction

Developers holding back launches of new home projects and the roller-coaster performances by the stock markets the world over did little to calm the lingering jitter already fe

lt since late last year. The Government of Singapore Investment Corporation (GIC) came out in the open to explain its decision to buy into UBS and hinted that it was ready to crack its huge war chest for more established banks in distress. The GIC statement might well be the strongest signal so far for an imminent meltdown in the global financial market.

A fierce debate is now on whether the US is already in a housing-led recession or is going into one. In fact, across the US, individuals and businesses are tightening their belts in the wake of worsening problems in the housing market and air-tight credit.

(A) Uncertainties reign in the larger market

§ (A.1) Year of the Rat or Year of the Dread?

The second half of 2007 was marred by the US sub-prime housing crisis which has thus far appeared to be a bottomless pit.  The credit markets are still saddled with bad debts. With massive write-offs of over US$40 billion by banks and lenders in general, the trouble looks set to be dragged into 2008.

In response to the distressed situation, the US Federal Reserve, in three quick and decisive moves in January 2008 itself chopped interest rate down to 3% in order to prop up consuming spending. If the situation does not turn around by March, the Fed will make further rate cuts.

The threat of recession, inflation and even stagflation cannot be dismissed. It appears that 2008 will be amongst the most challenging market environments facing the US and the whole world in many years.

§ (A.2) US at the brink of recession while home foreclosures surge

An industry report in the United States showed that 2,200,000 homes or over 1% of all households in the US are facing the threat of widespread foreclosures.

In terms of percentage, the number represents 75% increase in repossession of homes by the lenders compared with a year earlier. However, the December figures showed a gloomier picture. A total of 215,749 foreclosure filings were recorded, making a 97% increase from the same month in 2006.

As it is, the US economic growth in the fourth quarter of 2007 was visibly down with only 0.6% growth, the worst performance since 2002. Manufacturing, housing, employment and consumer spending all turned in ineffectual performances in the final quarter of 2007. For the whole year, the US economy grew by only 2.2%, the weakest performance since 2002.

In 2007, US home prices in 10 major metropolitan areas fell a record 8.4% and there is still no sign of bottoming after 11 consecutive months of decline.

§ (A.3) US can absorb the massive write-downs

The raging Asian economies are expected to slow down this year as a result of the financial turmoil and a flagging housing market in the US which remained the largest buyer of Asia’s exports.

However, some optimists are predicting that US growth may hit 2.5% this year, up from last year's 2.3% due to better exports resulting from cheaper US dollars.

They argued that housing crisis alone cannot induce a recession, noting that previous US recessions had been accompanied by oil price spikes, runaway inflation and tight monetary policy.

US banks are sufficiently well-capitalised to absorb the huge write-downs of more than US$40 billion. It is not a situation like Asian banks during the 1997 Asian currency crisis.

§ (A.4) A recession in the US may help ease inflation in Singapore

As a nation heavily reliant on imports of energy and food, Singapore cannot avoid importing inflation from her trading partners. As such, inflation rate could hit a high of 6% in the first three months.

The quantum of the recent taxi fare hike, food price and oil price increases are all much higher than earlier expected. With 18% to 25% upward revision, the increase in Annual Values of real estate (including all types of properties such as residential, commercial and industrial properties) is significantly higher in 2008.

The consumer price index (CPI) surged 4.2% in November 2007 year on year, a 25-year high. However, the irony is that a probable US recession this year could ease inflationary pressure with demand for essential goods and oil going lower as a result.

§ (A.5) Government’s objective to stabilise property prices

Minister for National Development Mah Bow Tan has acknowledged that the government had taken several steps to try and cool down speculative activity in the property market including the withdrawal of the Deferred Payment Scheme in September 2007 which was initially aimed at stimulating demand for housing during bad years.

However, the current property market jitter cannot be attributed to those cooling-off measures as the market had been affected by external factors beyond the authorities’ control, chief of which the lingering US sub-prime mortgage crisis which consequently induced the global financial market turmoil.
 
He said that news of ample supply of private residential properties in the next couple of years had also contributed to the current market lull as buyers choose to wait for choice purchase and more competitive prices.

The Minister assured the public that the government is keeping a very close tab on the real estate market and will be ready to tweak the policy levers anytime to ensure stability in the market.

(B) News on property sales in Singapore

§ (B.1) Dented sentiment causes developers to delay launches

Developers are resigned to the dented market sentiments in the aftermath of the sharp stock market correction in January 2008 and the growing fear of a recession in the US which continue to sideline prospective buyers. Many high profile launches have been shelved for the time being.

In fact, the consortium which is developing Marina Bay Suites has shelved the pre-Chinese New Year launch of its signature project at the Marina Bay area.

Keppel Land, one of the components in the consortium which owns Marina Bay Suites is also re-scheduling its other property launches to mid-2008. The planned delay involves the next phase of 400 units at the Reflections at Keppel Bay, The Tresor and Madison Residences.

City Developments also said it might consider short-term leases for Lucky Tower, which it acquired through a collective sale in May 2006.

Other developers had said that they would monitor global markets to see how things would develop before they launch any project.

So far, only Waterfront Wave, jointly developed by Far East Organisation and Fraser Centrepoint, has been launched to lukewarm response. Only three out of the total nine tower blocks were opened for the weekend preview and half of the 120 units on show were reportedly sold at between $750 and $800 psf. According to the developer, one of the units was sold at the highest price of $874 psf.

§ (B.2) 2008 unlikely to repeat the feat of last year’s vintage

A total of 14,826 new homes were sold in the whole of last year. The record number was 3,679 homes more than the previous year which saw 11,147 new home transactions.

Close to 90% of the new home deals last year were done in the first three quarters. Sales were reduced to a crawl in the last quarter of 2007 after the revelation of the severity of the US sub-prime mortgage crisis.

See below for property transactions in the four quarters of 2007. In the fourth quarter, the transaction of new homes was reduced to a trickle – not even half of the previous quarter.

Prices of new homes also fell and price gaps within each category of new homes narrowed.

The US housing crisis aside, another big factor causing the dip in confidence is the high asking prices that have gone beyond reasons. In 2007, a record 200 new homes were sold at more than $4,000 per sq ft (psf). This is a price level never reached in previous years.

As a result, a ‘tug-of-war’ has begun for many new home projects where the price gap between what developers are asking for and what buyers seem willing to pay is almost ‘unbridgeable’.

The waiting game is on and a more cautious mood among buyers may persist for the whole year; unless and until the global financial situation becomes clearer.

§ (B.3) Private home prices rose 6.6% in Q4

The URA price index for private residential property rose 6.6% in the last quarter of 2007. It was a shade lower than the 8.3% growth registered in the July-September period.

For the whole of 2007, prices for private residential property rose 31% - which exceeds four times the nation’s GDP growth of around 8%.

One of the reasons for the slower fourth quarter growth was the tentativeness of buyers after the government withdrew the Deferred Payment Scheme in September 2007 which was the main cause of the speculative froth seen in the first half of 2007.

Other recent measures taken by authorities to prevent a property bubble from ballooning included raising development charge (DC) percentage from 50% of market value to 70% (by itself a 40% increase) and making drastic changes to Collective Sales Laws to make it tougher for developers to buy older apartments collectively.

§ (B.4) Private home prices will ease in 2008

In the fourth quarter of 2007, the price increase was led by non-landed homes in outside central region (OCR) where the index showed an increase of 7.5%.

Prices of non-landed private residential properties went up by 7% and 7.3% respectively in the Core Central Region and Rest of Central Region.

Below is a quarter-on-quarter comparison price growth of the three geographical regions.

Prices are expected to slide across the board as about 41,600 new private housing units (out of the 65,400 in the pipeline) are expected to be completed between 2008 and 2010.

About 38,000 units in the supply line (or 58%) have not been sold by developers yet. Besides, this does not take into account new sites that will be made available for developers through the Government Land Sales (GLS) programme, which has been gaining momentum since late last year as developers’ choice instrument of land-banking.

§ (B.5) Market uncertainties depressed sub-sale activities towards end of 2007

Across the island, sub-sales as a percentage of total private housing sales fell from 14.4% in the third quarter last year to 10.7% in the final quarter.

In the Core Central Region (CCR), where speculation was the hottest, the sub-sale percentage fell from 24.8% to 18.6% over the same period. The drop could be attributed to uncertainty of the global financial markets as well as the withdrawal of the deferred payment scheme in September 2007.

§ (B.6) New home sale dropped

New home sales, which had averaged 1,480 a month between January and September, fell to below 600 per month in October and November last year.

In December 2007, only 305 new homes were sold, the lowest number since June 2007. Mid-tier homes and homes at suburban suffered the biggest drop with only 56 mid-tier units sold in December, 80% less than in November.

For suburban projects, the number of units sold fell to 60, a 35% drop in volume.

However it is a different story in the prime city centre. New home sales jumped 36% to 175 units, boosted by a bulk purchase of 97 units in Goodwood Residences at a median price of $3,200 psf.

§ (B.7) Demand for landed properties expected to rise

Demand for landed homes should remain strong and upside on the prices certain. This is despite the prices for landed homes having already risen 25% to 27% last year.

There are three main reasons why landed properties should still be favourites among home buyers:

— Firstly, the demand for landed homes will continue to be shored up by en bloc sellers who are displaced after handing over vacant possession of their properties.

— Secondly, the future supply of landed properties will be restricted to about 4,451 units over the next three years.

— And last but not least, when compared to prices of high-end condos, landed homes still lag behind by a long distance.