Property Market Euphoria Calls for Caution, Singapore Central Bank Chief
Developers, banks and home buyers should be cautious about the property market euphoria said Ravi Menon. Mr Menon who is the Managing Director of Monetary Authority of Singapore (which is Singapore’s central bank and financial regulatory authority) reminded developers who bid for land to be mindful of the huge supply which is coming on stream.
Mr Menon said, “We’re also telling individuals who purchase property to be careful. Interest rates are rising, be cautious of debt servicing burdens, avoid taking on too much leverage when buying a house.”
In calling banks to stress test when underwriting now for future scenarios, Mr Menon said: “We’re also telling the banks to be careful when underwriting, there’s euphoria now, everything looks good.”
Speaking at the MAS annual report media briefing, Mr Menon warned everyone to be sober, balanced and to exercise good judgement in the midst of the property market euphoria.
“We need to be mindful of the supply and demand dynamics and we have to ask ourselves whether demand will be able to match the big supply that’s coming onstream in the next few years,” said Mr Menon.
Noting the aggressive bidding by developers (both in en bloc sales and Government Land Sales tenders) against the expectancy of units available in the near term to more than double, the central bank chief warned that this could result in a supply imbalance and weight on the market.
The property market euphoria has also contributed to a resurgence in prices and transactions in the private residential market over the past year.
The recent release of flash estimates by the Urban Redevelopment Authority (URA) suggested that property price momentum here remains buoyant. Overall, the private residential property index increased 4.9 points from 144.1 points in 1st Quarter 2018 to 149.0 points in 2nd Quarter 2018. This represents an increase of 3.4%, compared to the 3.9% increase in the previous quarter.
There has also been a yearly increase in the number of property transacted and new mortgage loans granted by banks. The 25 per cent increase in the number of property transacted last year (from the previous 12-months), was matched by the 34 per cent year-on-year increase in new housing loans. Mr Menon said he welcomed the recovery, but that “it needs to recover in line with economic fundamentals, not ahead of income growth.”
The escalating prices fueled by the property market euphoria increases the risk of a destabilising market correction later when additional supply comes on-stream, said the MAS chief. He added that MAS and the Finance Ministry were committed to ensuring a sustainable market and so are closely monitoring developments in the private residential property market.
A report by List Sotheby’s International Realty Singapore in April said that a large private homes supply will hit the property market soon. The report suggested that with the expected launch of 29 developments from this quarter to the end of 2018, as many as 14,200 private homes may come into the property market.
International Property Advisor chief executive Ku Swee Yong pointed out that the number of large private homes supply may be much higher. Ku noted that “as of fourth-quarter 2017, there are 27,940 and 3,080 vacant private residences and executive condominiums respectively.”
He cautioned against the adding of supplies to a market with shrinking end-user demand with high existing vacancies, and said, “the problem is, unlike the previous cycle, we have a lot of vacant units today due to decreasing expat population and weak job market.” “We may be building a house of cards,” Ku warned.
Paul Ho, chief mortgage consultant at icompareloan.com, agrees with Mr Menon and said that the property market euphoria is no reason for buyers to jump into the market.
“Those who already have more than 1 property, will stay away from the market as the prices are crazy and the fundamentals are weak and there is huge supply in the pipeline,” he said.
Mr Ho added: “I get a sense that it is more a portfolio diversification play given that they feel bullish about the Singapore Property market – given that the malaise of oversupply has been digested for many years. The situation is nowhere as dire. So, this is more about the confidence and the sentiments. The fundamentals of the Singapore property market remains weak.”
Some property consultants have also suggested that the low-interest rates which are being provided by the banks now are a major factor which is driving developers’ demand for the land bank.
Ku for example noted that there is the fear that the low-interest rate situation which has been with us since the Lehman crisis, may change at any time. “If there were to be a hiccup somewhere in the world, interest rates could spike up,” he said.
Developers’ demand for land bank is riding on the recovering residential property market, which has also propelled residential investment sales value to the highest level ever. Developers snagged some 26 plots of residential land (excluding sites yielding more than 20 per cent of gross floor area in other uses) worth $7.27 billion in the first three months of 2018. Of these, $5.83 billion were accumulated from 17 collective sales deals, while the sale of four government land sites (including one Executive Condominium plot) contributed a further $1.24 billion.
The low-interest rates (besides supporting the developers’ interests) is also sustaining the buyers’ fascination with new launches, driving the property market euphoria. But buyers have to be concerned since any hiccups in the global economic order (e.g. trade war between China and the USA) could see their interest rates sky-rocketing.
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