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Last year’s 3.9% rise driven largely by luxury segment; mass housing market being held back by weak demand

PRIVATE home prices may have posted their biggest gains in over five years last year - but according to at least one top investment bank, it is too early to crack open the champagne bottle just yet.

The ‘modest pick-up’ in residential property values recently ‘appears to be fuelled more by hope than fundamentals’, Morgan Stanley declared in a research report.

The report was released three days ahead of the latest Urban Redevelopment Authority (URA) figures, out last Friday, which show that private home prices rose 3.9 per cent last year.

While some property analysts hailed this rise as a sign that the once-moribund property market is finally starting to pick up, the report by Morgan Stanley does not paint such a rosy picture.

Consultants such as Mrs Ong Choon Fah, the executive director of DTZ Debenham Tie Leung, believe rising home prices are evidence that the property market ‘has definitely turned the corner’.

However, the Morgan Stanley report noted that though home prices have indeed inched up over the past two years, the trend might not continue.

Gains in the immediate future could be checked by oversupply and a lack of demand given already high ownership rates, it warned.

Renewed interest in the property market appears to be confined to the luxury segment, and the rise in prices has been driven largely by this sector, Morgan Stanley pointed out.

It also warned that ‘further developments on that front could be sparse’ since foreigners, who make up a significant proportion of luxury home buyers, are snapping up high-end units precisely because they are limited in supply.

For the lower tiers of the housing market, factors such as excess supply and low rental yields ‘may temper value appreciation’ in housing prices here, said the report.

Condominiums are running at a higher-than-average vacancy rate of 10 per cent, thanks to condo stock rising 44 per cent in the past five years.

Exacerbating this situation is an expected increase in condominium supply this year of 26 per cent, half of which is already under construction.

This excess supply has helped depress rental yields, which collapsed during the 1997 Asian financial crisis and have remained low ever since.

Although the housing market has recovered slightly since then, with property values climbing 17 per cent, rental values have actually fallen by 8 per cent since 1997, said the report.

Demand is also being held back in the mass housing market because Singapore has one of the world’s highest home ownership levels. Currently, 93 per cent of Singaporeans own their own homes, a dramatic rise from only 29 per cent in 1970.

The high home-ownership level also means that Singaporeans as a whole are already highly geared. Housing debt here amounts to 63 per cent of gross domestic product, second only to Australia in the region, which gives Singaporeans less leeway to drive up housing demand.

Looking ahead, the report predicted ‘a measured broad-based appreciation in the property market, with the high-end landed sector enjoying a speculative spike’.

Source : Sunday Times - 29 Jan 2006