Singapore enough unsold condos that, at the current rate of sales, it would take us four years to clear out the existing supply. And a much higher supply means property prices will come down, right? Possibly, but that’s a bit of an oversimplification:

Singapore’s supply overhang

According to The Business Times, there was an overhang of 31,948 units as of 30h September; at sales of about 2,500 homes per quarter, it will take about four years to get through this.

Also, in its recent Financial Stability Review, MAS noted that the number of unsold units from launches (excluding ECs) has doubled form last year – from 2,172 units in Q3 2018, to 4,377 in Q3 2019.

A lot of this can be chalked up to the en-bloc fever of 2017, when foreign developers – mostly Chinese – created a distortion in the market through aggressive bids. By end 2017, for instance, there had been some $6.1 billion in en-bloc deals; the third highest amount in history since 2007.

So why won’t prices fall for sure?

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With developers having paid high prices in 2017, discounts may be out of the question

In a more straightforward situation, the higher supply should cause home prices to fall; and I admit the possibility that they might. But there are a number of good reasons why – even in the face of a supply overhang – prices are more likely to stay as they are:

  • Higher bids and development charges in 2017
  • ABSD an QC deadlines don’t always mean desperate developers
  • A greater draw for some foreign investors, given economic uncertainty
  • There are a lot of potential upgraders in the next two years

1. Higher bids and development charges in 2017

To get a sense of how aggressive land bids were in 2017, let’s remind ourselves of the Stirling Road plot: the winning bid was about $1,050 per square foot, despite many analysts valuing it at just $780 to 1,000 per square foot. The total price for the roughly 21,190 square metre site came to around $1 billion.

Due to the surge of Chinese developers with deep pockets that year, land prices in 2017 were about a third (29 per cent) higher than in 2012.

In addition, 2017 saw the biggest hike in development charges since 2007. Out of 118 sectors in Singapore, 116 of them saw increased charges that year; the increases ranged from six to 29 per cent.

At those prices, developers already knew margins would be slim. There’s very little room for them to start discounting or launching at lower price points.

2. ABSD an QC deadlines don’t always mean desperate developers

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For the seven projects reaching the ABSD deadline in 2020, about 90 per cent of their units are sold

The Additional Buyers Stamp Duty (ABSD) requires that a developer complete and sell all units within five years, if they don’t want to end up paying the full 30 per cent (see the link). The Qualifying Certificate (QC) additionally applies to foreign and listed developers, with a time limit of seven years.

These deadlines do incentivise developers to clear their units faster. But whether we’ll see a lot of discounts depends on the number of developments nearing the deadlines. For example, there are just around seven developments, which may reach their ABSD deadline in 2020 – and most have sold 90 per cent or more of their units.

Even a developer that has a lot of outstanding units may not drop the price. For example, if a developer has, say, 80 per cent of its units unsold and the deadline is close. you also may not see a price drop – because even a discount at that point is unlikely to help them sell sufficient units. They would just take deeper losses by discounting, and then still getting hit by the ABSD / QC.

3. A greater draw for some foreign investors, given economic uncertainty

In September this year, luxury home sales ($10 million or more) reached an 11-year high; this was mainly on the back of purchases by foreign buyers. While that’s just in the luxury market, it’s an important reminder that foreigners see Singapore property as safe haven assets.

As the global economy takes a turn for the worse, more will see the potential benefits of parking their cash in our real estate. This year, the situation is aggravated by political turmoil in Hong Kong; that was one of the closest competing property markets, and pro-democracy protests could prompt more purchases in Singapore.

This can help in at least keeping prices where they are (although the days of foreigners being blamed for inflated property prices, like in 2013, are probably behind us).

4. There are a lot of potential upgraders in the next two years

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With some 50,000 flats reaching MOP in 2020 and 2021, there may be more upgraders adding to the demand for private property

Some 50,000 HDB flats will be reaching their Minimum Occupancy Period (MOP) within the next two years. This is a huge number; consider that on most years – such as 2013 to 204 – the number is in the range of about 9,000.

Of course, not all of these flat owners will move out; but it’s not uncommon for Singaporeans to sell and upgrade as soon as the MOP is up; and the large number of flats reaching MOP means we may see a commensurately higher proportion of upgraders. This may help to soak up some of the supply.

It also helps that, due to the weak global economy, the United States seems intent on maintaining or even cutting interest rates. This will help to keep home loans more affordable in Singapore.

While the oversupply will keep prices in check, it may be overly optimistic for home buyers to assume prices will fall

It is, regardless, a good situation of home buyers. They now have a wide range of available units to choose from, and the price increases have slowed significantly compared to last year. It’s fair to expect a bit of a “wait and see” standoff between buyers and sellers for perhaps the first part of 2020; but I doubt it will dampen enthusiasm for long.

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