Singapore Real Estate Market Review - March 2008

February was the Budget Speech / Debate month and the new Finance Minister had made his maiden speech in Parliament. One important change, i.e. the abolition of the Estate Duty Act, will benefit real estate sales in the mid- to long-term. [See Annex A for a short essay on Axing of Estate Duty]. However, the Finance Minister also said that in the short-term the real estate market would grow moderately and he did not expect Stamp Duty collections for this year to be as high as last year’s $3.8 billion.

For the month of February, investors and developers alike continued to be spooked by the on-going uncertainties in the global economy. Major developers were humbled into delaying the launches of many prestigious projects while buyers continued to stay home to watch the financial news on TV, which looked more like re-runs of the Winter Olympic skiing competitions – it’s all the way down. In short, a downward spiral appeared to be in motion in the new home market segment in Singapore. [See Annex C for recent transactions in the private resale market]

The high consumer price inflation had prompted the government to explain to the public that the sudden surge in January inflation figure was caused by a one off revision of the Annual Value of public flats.

(A) Uncertainties reign in the larger market

(A.1) MAS fears Asia will be hurt by the ailing US economy

In its first public comment on the global financial turmoil, the Monetary Authority of Singapore (MAS), warned Singaporeans to be ‘vigilant’ as the credit crisis has now started to have an impact on the real economy.

However, barring any sharp correction in the global economy, the short-term outlook for Asia remains generally positive. The current forecast is for Asia ex-Japan to grow at a fairly healthy pace of around 7.8% in 2008, one percentage point lower compared to last year.

Compared with the situation in 1997, Asian capital markets are now better developed and better primed to cope with sudden shock. But, due to Asia’s economic linkages through trade, investment and finance with the US, the long-term decoupling of Asia from US is not possible.

Actually, there is an imminent risk of the US being caught in a negative spiral involving tighter credit standards, reduced credit availability and slowing down of the macro economy. As such, policy makers in Asian have to face up to the challenge of how to contain the spread of that negative spiral to their respective home economy.

(A.2) New $2.8 billion write-down by Credit Suisse spooks investors

Credit Suisse announced on 16 February a massive $2.8 billion new write-down which gobbled up $1 billion from the bank’s profit.

The new revelation was shocking as the Swiss bank had earlier reported that it would suffer a smaller write-down of $1.3 billion. In fact, at this moment, many banks are equally clueless about the true values of many of their assets which are linked to the on-going US housing problems.

Credit Suisse’s total write-downs related to the global credit crisis have now reached about $3.7 billion, while its neighbour UBS has written off about $18 billion.

Some analysts have put the total figure of corporate write-downs relating to the US subprime crisis at near $150 billion; but the German finance minister thought that the losses could snowball to as much as $400 billion very quickly. And the truth is: anyone’s guess can be right.

The dangers are still lurking in the banking system in the developed world, as it is extremely difficult for the lending institutions to conduct a realistic assessment of the complicated financial instruments under the current market turmoil. This episode serves as a stark reminder that the fallout of the US sub-prime housing woes are far from over.

(A.3) US housing woes at its worst in 2007

The Bush administration has recently rolled out a rescue package, called ‘Project Lifeline’ for home owners facing foreclosure.  Six of the largest financial institutions in the US, which service almost half of the country's mortgages, will provide distressed homeowners with refinancing assistance and suspend proceedings for 30 days. Most of the households to be helped would already have been more than 90 days overdue in mortgage repayments.

The six lending institutions include JPMorgan Chase, Bank of America, Countrywide Financial, Citigroup, Washington Mutual and Wells Fargo.

The current problem was made worse by earlier resetting of rates on many mortgages. Many home owners simply defaulted and walked away from the wreckage defiantly.

The cities which are hardest hit include Sacramento where 43.6% of homes on the market have been lowered in price. There are currently 36,097 homes on the market there, with genuine buyers nowhere in sight.

Home prices in Las Vegas had fallen 17.2% between November 2006 and November 2007. From December 2006 to December 2007, the number of homes on the market surged by 30%, and with home sales at a snail pace, it is likely that there will be more price depreciation down the road.

Florida has three cities on the list of 10 fastest-falling markets, with Tampa down 11.7%, Miami depressed by 10.6% and Jacksonville in an 8.7% decline from last year.

As for Detroit, there is not much further for the city's housing prices to fall. In some areas of Motor City, banks are literally giving homes away if the buyer agrees to offer a price.

(A.4) US January home resale close to 10-year low

Sales of single-family homes and condominiums in the US dropped 0.4% in February 2008 to the slowest sales pace since 1999. The median price of a home sold in January slid 4.6% from a year ago to US$201,100. And the median price has fallen for five straight months.

Supply of unsold homes is still aplenty on the market and it will take a long time to clear that up. It means that prices will continue to fall in the worst housing slump for the US in a quarter-century.

Sales were weak in all parts of the US except the Midwest, where sales posted an increase of 3.4%. Elsewhere, sales dropped by 3.6% in the North-east, 2.1% in the West and 0.5% in the South.

Both new home sales and resale tumbled for a second straight year in 2007 due to the on-going credit crunch. Lenders are more careful nowadays and the market for sub-prime mortgages has essentially dried up.

(A.5) Foreclosure rate of US homes up by 57%

The number of US homes being repossessed by their lenders has increase 57% in January compared to the same period a year ago.

As of January 2008, a total of 233,001 homes received at least one notice from lenders related to overdue payments. This is a 63.7% increase in distress loans, compared with 148,425 a year earlier.

The number of house owners who received the default notices for the first-time increase almost 50%, suggesting that more and more house owners are starting to face difficulties making mortgage repayments. Technically, if these households receive two more default notices, they will be considered delinquents.

In January 2008, one in every 534 homes was foreclosed. It was an 8% increase from December last year.

(A.6) $6.4b surplus a one-off phenomenon – Mr Tharman

The Singapore government was pleasantly surprised by the sheer size of the Budget surplus of $6.45 billion. It was the highest surplus since the last bull-run in 1994.

In fact, the unexpectedly huge surplus owes a huge part to last year’s property bull-run which contributed a total of $4.9 billion to the coffer, including $3.8 billion in Stamp duty ($2.3 billion higher than expected) and another $1.1 billion in other property-related revenues.

However, the Finance Minister forecast that Stamp duty collection will be reduced by 36.8% or $1.4 billion to $2.4 billion in 2008, due to moderation in the property market and fewer en bloc deals. Property transaction volume is expected to be lower while prices appreciate more slowly. [See Annex B for a short essay on Stamp Duty]

 (A.7) Ministry explained sudden surge in public housing costs

MTI assured that the 6.6% jump in consumer prices last month, though high, was consistent with the official full-year inflation forecast of 4.5% to 5.5% as the sudden jump in consumer prices was in part caused by the significant 11.1% jump in housing costs due to the Government’s one-off revision of the annual value of public flats.

MIT explained that the annual value of a public flat is the theoretical rental income that a house could fetch in a year. The rise in annual value does not actually affect expenditures of most Singaporeans, who own instead of rent the homes they live in.

The ministry also explained that price levels were especially low in January 2007 due in part to service and conservancy rebates given out that month. But for this year, the government had already given out the rebates in December.

(A.8) US credit crunch boosts Sing dollar debt market

If anyone was searching for good news, this may be it. Ironically, the weakness in the US market is presenting Singapore with an opportunity to prosper. The Singapore dollar market is a sound alternative funding source as Singapore is a mature developed market with significant investor base and a stable pool of investors. Unlike the credit squeeze situation in the US, the liquidity situation in Singapore continues to be good for rated, good quality issuers.

Foreign banks and companies facing a liquidity squeeze from their traditional funding sources such as US dollars, euros and yen, are increasing turning their attention to Singapore's corporate bond market.

Official statistics showed that in 2007, foreign issuers made up 55% or $6.9 billion of the total corporate bond issuance, compared with the 44% or $5.8 billion issuance a year ago. There are now more foreign bond issuers in Singapore – to be precise, 73 foreign issuers in 2007, up from 64 in 2006.

Since the onset of the US sub-prime crisis, local banks have teamed up with foreign players to arrange for such bonds, for example, the Morgan Stanley's $510 million Singapore dollar issuance jointly led by OCBC and Morgan Stanley.

In February 2008, OCBC was the joint lead arranger for Lehman Brothers' bond issue to raise $250 million, the largest Singapore dollar foreign investment bank issuance, at a coupon of 4.2%.

In fact, the corporate bond market in Singapore has outperformed the stock market so far this year.