Private home prices in Singapore are forecast to dip by 3 to 7 per cent next year, while rents are expected to fall by 5 to 10 per cent, burdened by persistent housing oversupply and the imminent rise in interest rates, said OCBC Investment Research analysts Eli Lee and Andy Wong Teck Ching in a report published on Friday (Dec 9).

Although housing prices are seen continuing the decline that began since the second half of 2013, a severe drop is unlikely, as significant buyer demand is expected to come into the market at lower price points, while the Government may ease cooling measures if the economic outlook deteriorates rapidly, they added.

“We believe that the current physical oversupply situation would persist over 2017, which will continue to drive falling prices ahead. We entered the current oversupply situation in late 2013, and the islandwide vacancy rate rose 3.3 percentage points from 5.4 per cent as at end-2012 to 8.7 per cent as at end of the third quarter in 2016. Similarly, the rental index of the private residential sector islandwide dipped 10.6 per cent as at end of the third quarter in 2016 from its peak in the third quarter of 2013,” said the analysts.

Meanwhile, rising interest rates will add pressure on mortgagors and curtail marginal demand, with the US Federal Reserve set to raise its benchmark rate target next week for the first time in a year. Investors see a 95 per cent probability of a 25-basis point rate rise to between 0.50 and 0..75 per cent at the Fed’s Dec 13-14 meeting, indicated federal funds futures pricing on Friday.

“The OCBC Treasury Research team expects that domestic benchmark rates, i.e. short-term Singapore Interbank Offered Rate and Swap Offer Rate, for mortgages will broadly rise 80 to 200 basis points from now to end 2020. Together with the impact of falling rentals, we expect this to put future pressure on rental carry for investment home owners, and will result in incremental selling pressure into the secondary market for marginal home owners who are over leveraged,” said the analysts.

After the 2008-’09 financial crisis, private property prices in Singapore staged a strong rebound, characterised by brisk activity in the Outside Central Region, or mass market. Mass market home prices rebounded 63.2 per cent from the crisis trough, while home prices in the Core Central region, or luxury segment, achieved a more muted ⿨36.1 per cent rise, said the analysts.

Private home prices, however, reached an inflection point in the third quarter of 2013 after the implementation of cooling measures and loan curbs, which included the landmark Total Debt Servicing Ratio (TDSR) framework introduced in June that year. A broad-based but gradual bear market ensued, and private home prices fell 10.8 per cent over 12 consecutive quarters from the third quarter of 2013 to the third quarter of this year, they added.

Despite the downward pressures, a steep price drop is unlikely, as homebuyers will be able to continue servicing their loans, with the unemployment rate in Singapore at a low 2.1 per cent as at the end of the third quarter of 2016. OCBC forecasts Singapore’s GDP growth at 1.3 per cent and 1.5 per cent in 2016 and 2017, respectively.

“This economic backdrop is fairly benign, despite unfavourable sector-specific forces, and we believe that a sharp price correction appears ⿨unlikely,” said the analysts. If economic conditions worsen rapidly, the Government has the scope to intervene.

“The Singapore authorities have a strong track record of actively reviewing its property legislation with respect to its goals of ensuring stable housing prices and stability in the financial system, and had in fact tweaked existing TDSR measures in Sept 2016 to extend the exemption of TDSR rules for those looking to refinance loans for owner-occupied residential properties, and also for investment properties given certain restrictions,” said the analysts.

The analysts expect primary residential sales to remain muted at between 6,000 and 9,000 units next year. “Despite prices continuing their downtrend in 2015 and 2016, the rate of sales appears to have stabilised near that in 2014 (about 1,800 to 2,000 units sold per quarter), with about 5,700 units sold in the first nine months of 2016,” they said.

Adapted from: TODAY, 10 December 2016

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