SG/HK Property: Justifiably Expensive

BMI View: Both Singapore and Hong Kong have enacted the harshest set of real estate cooling measures to date in an effort to keep a lid on skyrocketing property prices. While the measures will likely result in considerably lower property transaction volumes over the coming months, we do not believe that a substantial sell-off is nigh. Instead, the real trigger for the two markets is more likely to be the eventual normalisation of interest rates, which will stretch the affordability of mortgage payments and negate rental profits. However, we believe that both cities' property markets boast strong underlying fundamentals which will continue to support price appreciation over the long-term.


The Monetary Authority of Singapore (MAS) on January 11 th announced the implementation of its strictest raft of real estate curbs yet, applying higher stamp duties across the board, as well as lowering loan-to-valuation (LTV) allowances and applying fresh stamp duties to sellers of industrial real estate. The curbs are aimed at cooling what has been one of the region's hottest property markets over the past few years, with the city-state's private property price index having increased by 59.0% since bottoming in Q209.

Fundamentals Still In Place

Although the measures are likely to take an immediate toll on transaction volumes as potential buyers adopt a wait-and-see approach, they do not necessarily presage a substantial correction in market prices. In fact, the key fundamentals that have supported the property market's meteoric rise, including an extremely low interest rate environment, still-ample liquidity, and rapid population growth (which, combined with Singapore's innate space constraints, continues to support soaring rents), are still in play.

Furthermore, despite slowing economic growth, Singapore's labour market remains among the most robust in the world, with an unemployment rate of just 1.9%. Wage growth has been solid if not spectacular, with median citizen income (including employer funded CPF) rising by 27.8% between 2007 and 2011. Beyond this, although it is among the more expensive markets in the world, private property in Singapore caters to only a small portion of the population, the rest of whom live in HDBs, or government subsidised public housing. Approximately 80-85% of Singaporeans live in HDBs, meaning that the purchase of private property is generally seen as elective and largely restricted to those in the top two income deciles.

Purchasing Power Aplenty
Singapore - Median Monthly Household Income By Decile (LHS), SGD & % chg y-o-y

Affordability Remains In Bounds

While new HDBs are subsidised, eligibility to purchase these flats is generally limited to young married couples and senior citizens. On the other hand, resale HDB flats are available for purchase by all Singaporeans and Singaporean Permanent Residents, making this the largest subsection of the overall market. The median price for resale HDBs hit a record high of SGD455,000 in Q412, implying a monthly mortgage payment of approximately SGD1,900 for a buyer with good credit. Against Singapore's estimated household income for earners in the 41 st-50 th percentile of SGD7,418 per month in 2012 (derived from 2011 data and estimated nominal GDP growth in 2012), such a mortgage payment would amount to a hefty but still affordable 25.6% of monthly pay (or a 5.1x price to annual income ratio). For the 51 st to 60 th percentile, payments would constitute a more reasonable 21.3% (a 4.3x price to income ratio).

On The Up And Up
Singapore - Private Property & HDB Resale Indices (LHS) & % chg y-o-y

Given that private property makes up approximately 15% of the market, it is more appropriate to calculate affordability against wages in the second highest decile. In 2012, average monthly household income within Singapore's 81 st-90 th percentile is estimated at SGD16,362. Assuming an average price of SGD1,200,000 for a new, mass-market condominium, and an interest rate of 2.0%, monthly mortgage costs come to approximately SGD3,800, meaning that such properties remain within the realm of affordability (23.2% of monthly income, or a 6.1x price to income ratio) for their target buyers. Notably, although Singaporean real estate price to income ratios are relatively higher than those found in other developed markets such as the US and UK, we believe that the city-state is more analogous to locations such as New York City and London.

Interest Rate Normalisation Poses Risk

As such, we find that properties are not out of range of target buyers in terms of monthly mortgage payments, which is largely a result of the extremely low interest rate environment. Although we do not see scope for a considerable correction in the Singaporean property market in the near future, we note that interest rate normalisation could effect a substantial impact on prices. Indeed, just a 2.0 percentage point rise in the mortgage rate on the aforementioned condominium would take the monthly payment to an uncomfortably high 30.0% of monthly household income, making private property considerably less affordable. Low interest rates also allow landlords to turn a profit despite Singapore's relatively low rental yields near 3.5%, and rising borrowing costs would likewise dampen demand from this set of buyers. Additionally, supply of new private property units in the pipeline is ample and growing, and the government has also increased its annual new HDB target from 20,000 per annum to 23,000. Over the coming years, this will help to dampen the effect of supply constraints brought about by the under-building seen following the global financial crisis.

In result, a moderate correction in property prices is likely over the medium term. At the same time, government measures, which will cool demand in the short-term, will also have the effect of softening any eventual correction, and we do not expect a dramatic fall in prices in the absence of a major global economic downturn. That being said, Singaporean banks face a small but growing risk vis-à-vis a rapid rise in interest rates given their growing exposure to housing loans. Housing loans have risen as a proportion of total consumer loans from 67.4% in December 2005 to 73.4% as of November 2012. While Singaporean household balance sheets are extremely healthy and we would not expect a rash of foreclosures in any case, Singaporean borrowers could nonetheless be stretched by rising mortgage payments at the same time as the value of their properties would be falling.

Concentrated Exposure
Singapore - Consumer Credit Breakdown, % of Total Consumer Loans

Stars Aligned For Long-Term Appreciation

Over the longer-term, however, we believe that strong fundamentals will continue to support Singapore property prices. Although economic growth in the city-state has slowed following the boom years of the 2000s, wage growth will continue to be robust over the coming decades as a result of an extremely tight yet relatively free labour market. The government is expected to announce that it has adopted a population target of 7.0mn by 2030, implying that the rate of population growth will be 1.5% per annum. Given Singapore's extremely low fertility rate, which stands at approximately 1.2 (well below the replacement threshold of 2.1), the bulk of the population gain will be on the back of fresh immigration inflows. The population paper therefore indicates that the government plans to keep the doors open to a relatively broad spectrum of foreign workers, who will in turn support the city-state's solid demand fundamentals. Coupled with Singapore's world-beating business environment and robust property rights that will continue to attract substantial interest from foreign investors (particularly those from China, Malaysia, and Indonesia), we believe that the country's long-term real estate outlook remains among the most sanguine in the region.

Hong Kong

Singapore has not been alone in its fight to curb skyrocketing property prices. The Hong Kong government has, since 2010, implemented six rounds of cooling measures in an attempt to rein in real estate prices, with the three most recent curbs being introduced over just two months, in September and October 2012. October's tightening, the harshest yet, saw foreign and corporate buyers slapped with a 15% levy, while the resale tax on properties sold within three years was also raised. Widely regarded as having one of the priciest real estate markets globally, property prices in Hong Kong have more than doubled since hitting a trough at the end of 2010 and surged more than 25% in 2012 alone.

Sky High
Hong Kong - Property Price Index

The government's most recent cooling measures have started to display some measure of efficacy, as residential property transaction volumes have clearly started to decline (see chart), and we expect such a phenomenon to maintain course in the coming months. That said, we highlight that this does not necessarily augur an immediate correction in property prices. In fact, we continue to believe that there still remains room for further upside in prices, although scope for further gains is likely to be limited.

Curbs Taking A Toll
Hong Kong - Property Transactions And Value

Supportive Pressures Still Intact

Firstly, a low interest rate environment and readily available cheap credit, factors that helped kick-start the upcycle in the property market, continue to provide fuel for housing demand. Negative real deposit rates and the positive carry from mass market residential units remain a key attraction for property buyers. Secondly, despite an evidently weaker economic climate, the labour market has remained surprisingly resilient, with the unemployment rate averaging 3.3% in 2012, reaching a decade low. Income growth, as in Singapore's case, has been relatively robust, growing 18.5% between 2008 and 2012. We expect city's labour market to remain resilient, which should in turn continue to support purchasing demand. Thirdly, cross-border mainland buyers, who have remained relatively apprehensive as a result of the property curbs and the domestic leadership transition, are unlikely to remain on the sidelines for much longer. Chinese buyers typically view the Hong Kong property market to be a more attractive investment relative to the mainland, given the city's political autonomy, international exposure and fundamental land constrictions. Once the initial knee-jerk reaction to the recent property curbs start to abate, Chinese buyers, who are also likely to be buoyed by the cyclical upturn in China, are likely to return to the market. Finally, despite the government having made material efforts to ramp up land supply, actual housing supply is expected to only come online towards the end of 2014. This consequently means that the city's tight housing supply situation will continue to provide supportive pressure for prices in the near term.

Elemental Pressure
Hong Kong - Property Inventory Stock (LHS) and Unemployment Rate (RHS)

...But So Are Corrective Risks

Despite the hitherto mentioned factors, we are of the belief that residential property prices remain considerably overvalued and we are not abandoning our view of a correction in the property market. Housing unaffordability appears to be worsening, as the price-to-income ratio stood at 17.6 in 2012, according to a Knight Frank report. Given the rising levels of social discontent, the government is likely to keep a keen eye on further escalations in real estate prices, which suggests that further tightening measures are unlikely to be out of the picture. Additionally, once housing supply comes online, we can expect the upwards pressure on prices to ease considerably. The timing of release of new units will be crucial, given that another pertinent risk stems from the normalisation in the interest rate cycle. With the supply situation likely to be alleviated in 2014, and the next upcycle in interest rate likely to begin in 2015, these two factors could combine to have severe adverse implications on the property market.

Remaining Neutral On Banking

This could also carry repercussions for the city's banking sector, given that mortgage loans account for almost half of banks' total loan portfolios. We highlight, however, the negative impact may be helped by the banking sector's increasing exposure to the offshore yuan services sector. As we have continuously highlighted, Hong Kong's financial sector is expected to play an increasingly larger role in China's financial sector reforms and this may help to stem the downside impact from a correcting property market.

Fundamentals Buttress Long Term Appreciation

Despite our downbeat inclinations in the medium-term, we continue to harbour a relatively sanguine view on the Hong Kong property market over the longer-term. The government's plans to increase housing supply come at a more measured pace, as compared to the supply glut we witnessed between 1996 and 2000 (see chart). Additionally, there remains strong fundamental demand for residential property, given that a considerable portion of the population, having been priced out of the home ownership market resides in public rental housing. Alongside this pent up demand, a relatively strong population growth over the longer-term will continue to provide robust housing demand.

This article is tagged to:
Sector: Country Risk, Real Estate
Geography: Asia, Asia, Hong Kong, Singapore, Asia, Asia

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