This article first appeared in: TODAY “Two tier housing market likely this year” 06Jan17

My forecast for residential prices to drop by 8-10% in 2016 was off the mark. URA’s private residential index turned out surprisingly resilient, dropping a mere 3.0% for the whole year, while the HDB resale price index ended the year almost where it began.

While it looks like the policy measures have managed to stabilise prices in the residential market, a deeper look at the numbers reveal that the overall B-grade result was achieved through A grades in a couple of subjects and B, C and D grades in other subjects. Examining the performance of the various regions and sub-types such as landed housing, we might conclude that 2016 was a directionless market.

Several factors point to a continued search for direction in 2017.

Upward Pressure on Price Indices 

More than a dozen HDB flats transacted above the S$1 million mark in 2016 and many more set new local records of above $900,000 in the resale market to push up the HDB resale index. 

Developers have also contributed to the upward shift in the private residential price index. For example, a few projects which have gone quiet for more than a year started selling briskly when developers offered discounts and attractive payment schemes. Even with discounts, the prices achieved for these relatively new apartments were higher than the average prices in their respective neighbourhoods, nudging the index upwards. 

MAS and IRAS have proposed regulations, and as of 01Jan2017, implemented the Common Reporting Standard (CRS) with 46 countries. The first Automatic Exchange of Information (AEOI) will commence in 2018. This is an agreement among participating countries to share information about each other’s residents’ gross financial assets. The key element in the exchange, is to disclose the value of the high net worth individual's bank accounts.

Some foreign high net worth individuals might not feel at all comfortable that the value of their accounts are being disclosed to their home country's taxman. We might therefore expect a fraction of them to trade their financial assets for other "real assets" like luxury properties.

It seems that there is plenty of liquidity amongst high net worth investors and prudent owner occupiers who have not placed their property bets in the frothy market 3 years ago. And perhaps the above are reasons why the government is reluctant to relax any cooling measures.

Abundant Downward Pressure

Investors who ran low on holding power have sold their properties with losses or defaulted on their mortgages. According to research by The Edge Property, the proportion of unprofitable deals rose from 10% (447 of 4,687) in 2015 to 17% (873 of 5,264) in 2016. These figures refer to resale transactions of condominium and apartments where the previous caveats can be traced.

Defaults on residential mortgages increased from 2014 through to 2016 and is likely to increase further as retrenchments and vacancies increase, rentals decline and interest rates rise in 2017. 

Developers avoiding penalties imposed for not selling out their new projects will probably slash prices for bulk investment deals, and offer attractive payment schemes and stamp duty absorption to clear the remaining units.

Adding to the pressure is an increasing supply in the second hand market. An increasing number of families who treat HDB flats as investments are eligible to sell their flats after the 5-years Minimum Occupation Period (MOP), such that resale values have declined, especially those in less desirable locations of Singapore, such as 5-room flats in Choa Chu Kang, Jurong West, Punggol, Sengkang and Woodlands.

The situation is similar for Executive Condominiums which has a MOP of 5 years and for private residences which are “discharged” from the four-year Seller’s Stamp Duty (SSD) liability. Due to the massive ramp up in residential developments post-Lehman Crisis, the supply of resale HDB flats, ECs and private homes are expected to increase in the next few years, pressuring prices further down.

This is good news for buyers who are looking for good-value picks. Property agents may also celebrate the potentially higher transaction volumes.

Conclusion

Barring seismic shifts from global political and economic events, what might happen when the upward pressure of excess liquidity combine with the potential increase of resale residences? 2016 presented us with a hint of the answer: a two-tier market will develop in both the public and the private housing segment. 

We may expect the massive supply and weak rental demand in the outskirts of Singapore to bring prices down. Meanwhile, cash-rich investors looking for gems in the market will focus on centrally located properties. I believe that this trend will continue for the next three years and price gaps will widen.

As the market waits out the supply glut to be absorbed through population growth, investors might do well to appoint a diligent property agent to sift out the well-built, undervalued, freehold private residences in Districts 9 and 10. When the next economic boom hits Singapore, the value of these properties will simply jump. Bargaining power is enhanced with scarcity.