HOW HIGH WILL THEY GO?

June 22nd, 2012 Posted in General

Up Up Up seems to be the only way they are going! Why is it that Private Property prices never seem to be coming down?

We all remember how the property market sprung back to life after the 2008 Global Financial Crisis. Since then, private property prices have been on upward trend. Its robust recovery was worrisome at times and fears of an impending bubble prompted the government to implement some cooling measures at several points throughout the last 3 years.

These measures, although direct and well targeted, have been argued to be less than effective in lowering prices in the property market.

According to URA’s PPPI, the first decrease in prices were only noted in the first quarter of 2012, when the index moved down marginally from 206.2 from the last quarter of 2011 to 206. This decrease however was hardly obvious with prices still remaining high. In fact the priciest unit sold by a developer in May was for a whopping $4,566 psf at Scotts Square. It beat last month’s most expensive unit at Hilltops by almost 3.8%!

In Jan 2012, there was a huge surge of new launches released into the market. The market reacted to this abnormally large injection of new units with strong uptake. This resulted in high private home sale activity in the first 3 months of 2012.

As the hype and excitement of the new launches die down, recent reports are indicating that sales volumes of private homes are decreasing and demand is dwindling. The market is moving back to normality, however, we do not see private home prices taking a similar dip and correcting. Isn’t it the basic law of economics that when demand is lower than supply, prices will correct back to equilibrium? Why are we not seeing this?

The answer is simple; MONEY. The banks are holding on to a lot of cash. Taking quick look at our savings and deposits over the past 2 years, it has been consistently high, and in fact growing strongly. This excess liquidity has not only been supporting the property market, but also driving it for the past 3 years.

Because banks are holding on to so much cash, they need to find a way to lend the money out and make it work for them. They throw out low interest rates to free up the lending environment and support higher valuations to keep the property market spinning (and in doing so, bringing them a steady supply of customers). This has been keeping property market prices artificially high.

However, everything that comes up must eventually go down, although it is difficult to say when we will start noticing changes.

With the crisis in the Eurozone looking more and more likely by the day, we would definitely expect property prices to move downwards.

Tune in here to listen to what Getty Goh has to say about this!

http://www.channelnewsasia.com/video/index.php?vidfile=w120615_sg_newhomes.flv

(Featured on MediaCorp’s Channel News Asia on 15^th June 2012)

By Hanna Safdar, Junior Research Executive, Ascendant Assets Pte. Ltd.