Will the Upcoming Supply Cause Singapore Property Prices to Fall?

In a fascinating and contrarian report, Dr. Chua Yang Liang of Jones Lang Lasalle argues the surge in imminent supply will not cause property costs to fall. In this piece I will be able to sum up his arguments and add some of my very own thoughts.

Latterly a few property analysts have been disagreeing that a correction in the Singapore residential market is in the pipeline in 2014/2015 due to the large stock of housing completions during that period (50,000 public + non-public unit every year), which is 2.5 times the average completed since 2001.

Dr. Chua considers that home property costs will not fall notwithstanding this huge increase in supply for the following three reasons:

1. The Singapore home market hasn't corrected based totally on supply alone in the decade

Doctor Chua figures out 2 metrics he terms as the short-term and long term balance of housing stock. The short-term balance compares his predicted household demand formation (e.g. from unions and immigration) with the housing completions based on URA and HDB data. The long term balance is the accumulative sum of the short term balance over time.

He argues that if you compare this short and long-term balance of homes with the URA Property Price Index (PPI), you'll find the PPI is generally sentiment and not supply-driven. As an example, the two major corrections in the PPI since 1998 were in 2000-2001 and 2007-2008, that occurred due to external shocks and in spite of the housing balances indicating a stock shortage.

2. Immigration is likely to maintain and support the requirement for impending new supply

Doctor Chua believes the recently mentioned population target of 5.5 million by 2050 is too low, as it suggests a rate of growth of just 0.2% every year over the following 40 years, which will be insufficient to support economic growth.

He thinks in the low case we should use the 6.5 million target by 2050 (which was employed by URA in the 2000 Concept Plan), and in the high case we could hit 5.5 million by 2015 (which would involve keeping the resident population growth rate at the same pace as 2010 while slightly bringing down the foreign population rate of growth).

This continued expansion in population will thus generate new requirement for the upcoming supply.

3. “Residual demand” backlog is likely to keep costs stable

The population has increased from 4.02 million folk in 2000 to 5.1 million in 2010, a 2.4% yearly compounded grow (with the non-resident population growing at 5.6% compounded). But the total housing stock (private and public) has only grown from 956,275 to 1,158,885, or a 1.9% annual compounded increase.

The net result is that the size of the average countrywide household (Dr. Chua uses total population divided by total housing stock excluding worker and student dorm housing, which is different from the Census definition) has increased from 4.21 folks in 2000 to 4.37 people in 2010.

Dr. Chua believes that there has in effect been a “backlog” of demand created by the inability of supply to hold up with growing demand over the past decade, and so the impending supply (along with immigration) will just result in a relieving of this backlog and a balancing of long term supply and demand, with the average household size falling back to its long-term average of 4.08 with a population of 5.5 million by 2015.

The big approaching supply will thus not crash the market but instead help to fix the longer term shortage of housing, and Dr. Chua forecasts that the PPI will still record a mean growth of 1.8% until 2015 (based on a population expansion target of 6.5 million by 2050). If the population increases to 5.5 million by 2015, Doctor. Chua forecasts a continuing delinquency in housing stock, therefore pushing up prices by 7.5% a year.

Doctor Chua’s bottomline is that no matter what the immigration levels are, we won't see a dip in the PPI (barring an external shock). He also recommends that policymakers continue to release land to support a. Supply of 16,000 to 24,000 housing units each year.

My thoughts on Dr. Chua’s disagreements

I believe Doctor. Chua’s “residual demand” argument is fascinating and introduces the concept of a long term demand backlog due to the inability of supply to catch up with our population expansion over the last decade (generally driven by immigration).

I’m not sure nonetheless, about his forecast of a steadily rising PPI.

First, while the upcoming supply may serve to balance out the demand backlog in the long term, I think that in the short term there can still be a significant case of indigestion by a giant quantity of supply coming onto the market over a short while period.

Second, Doctor Chua takes the existing price levels as fair and then forecasts the matching of supply and demand going forward. Could the existing price levels already reflect a serious supply deficit situation, and correct to “fairer” levels when the new supply comes online? Markets are made at the margin, and prices are determined when debatable demand meets debatable supply.

Thirdly, there can also different outcomes for different segments of the market. For example, the rental market for shoebox units is predicated on the continued influx of pro immigrants, which will be affected if this doesn't happen.

Fourthly, as Dr. Chua points out himself, in the near term the PPI is largely driven by sentiment and not by movements in supply. We could potentially see external shocks coming from a Developed world recession, Western European crisis etc, which would impact Singapore’s open economy negatively. At the same time, many world stockholders are also starting to see Singapore and the Singapore Buck in particular as a “safe haven”. This can lead to foreigners continuing to support the high end market, as we've seen in Hong Kong with the inflow of Chinese buyers.

With so much uncertainty in the markets, I think speculators should adopt a wary attitude, but be on the lookout for opportunities “as we saw during the last World Finance Crisis, the window for buying low can appear and vanish quickly.

Hope that you enjoyed reading this Singapore property market article!

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