www.shaproperty.com: [RealEdge] BT Property Supplements : When will the mass market move?

Thursday, October 12, 2006

[RealEdge] BT Property Supplements : When will the mass market move?

Published October 12, 2006

When will the mass market move?

In the residential market, sales of 99-year leasehold property have slumped while other sectors experience a surge in demand. HAN HUAN MEI looks at the dynamics of the mass market

IN the first six months of this year, the private residential market registered 4,385 units in the primary market and 5,451 units in the secondary market. It has benefited from the brisk sales momentum, which started in 2005, when demand in the primary and secondary markets chalked up the corresponding transaction volumes of 8,955 units and 7,582 units for the year.

This represents a 55 per cent increase in the primary market and a 38 per cent increase in the secondary market over 2004. Overall prices, according to the URA residential price index, also increased by 3.3 per cent in the first half of 2006 and 3.9 per cent in 2005, while luxury homes increased by some 25 per cent in the 12 months from mid-2005 to mid-2006. The outlook for the residential market looks bright; however, the question that begs to be asked is: Does this increased demand and the rise in prices apply to all segments of the residential market, especially the mass market? If not, when is the mass market ever going to pick up?

A breakdown of new home transactions according to different price bands ($ per square foot) shows that the proportions of homebuyers purchasing luxury, prime, prime-low and mid-tier residences have been on the increase. These are for properties that are priced at more than $700 psf.

However, the proportion of mass 99-year leasehold and freehold units being sold in the market (priced at less than $700 psf) has been decreasing from a high of 92 per cent in 1998 to a low of 53 per cent in 2005. In the first half of this year, it registered the lowest level of 50 per cent. With half of all homebuyers purchasing either a mid-tier, prime or luxury home in the six months, homebuyers' buying power has strengthened significantly.

The financial muscle of homebuyers is encouraging, but what about the long-term sustainable growth demand from the base of the market? After all, the overall sustained health of the private residential market will also have to depend on entry level homebuyers, consisting mainly of HDB upgraders.

The main obstacle that would prevent the floodgates from opening appears to be HDB resale prices ... Currently, HDB resale prices are 9.3 per cent below the last peak in Q1 2000, and 24.9 per cent below prices in Q4 1996, when HDB resale prices were at their highest.

According to the latest published HDB Sample Household Survey in 2003, 13.2 per cent of HDB residents were still considering upgrading. This translates into 108,389 households. In the same survey, 14.5 per cent of HDB households indicated that they would like to move to a private residence within the next five years. This is a potential 22,000 buyers between 2003 and 2008, or an average of about 4,400 HDB upgraders per year. And yet, the number of caveats lodged with HDB addresses (used as a proxy for HDB upgraders) in the private new home market has been decreasing from about 6,600 in 2002, to 2,300 in 2003, to 2,200 in 2004, before recovering to about 2,400 caveats in 2005.

In the first six months of this year, only 1,100 caveats were lodged by HDB addressees. The decline in HDB upgraders in the last few years suggests a possible build-up of demand from HDB upgraders that might occur sooner rather than later. However, the main obstacle that would prevent the floodgates from opening appears to be HDB resale prices.

The HDB resale factor

Since the 1990s, prices in the private residential market and the HDB resale market have moved in tandem and are strongly correlated. In 2002, HDB resale prices fell below 1998 levels but recovered by 11.7 per cent by Q1 2005. However, in April 2005, the recovery was abruptly halted by the government's implementation of anti-cashback measures. The HDB resale index fell by 4.8 per cent in Q2 2005 while private property prices strengthened. Currently, HDB resale prices are 9.3 per cent below the last peak in the first quarter of 2000 and 24.9 per cent below prices in the fourth quarter of 1996, when HDB resale prices were at their highest.

For many HDB homeowners who bought their flats when HDB resale prices were higher than they are now, there is little incentive to sell below their cost. However, should HDB resale prices increase by some 10 per cent, many of these HDB flat owners might be enticed by the still low private property prices in the mass market to sell their HDB flat and upgrade to a private home.

The drivers of upgrader demand appear to be the basic fundamental elements of employment prospects, wage levels, CPF contributions and gains from the sale of their HDB flats. Combined, these different elements directly affect upgraders' overall ability to afford to move to private residential homes from their present HDB one.

Suffice to say that there were only a few 99-year leasehold projects launched since 2005, traditionally viewed as the typical product type for HDB upgraders and first-time buyers of private residential property. This lack of new launches for the mass market has also been part of the reason why there has been very little activity affecting the lower end of the residential market.

Looking ahead in 2006, there are positive signs for the economy, with unemployment at 2.9 per cent as at Q2 2006 and wages likely to build on the estimated 6.5-7.5 per cent GDP growth for 2006. And after a year where there has been a dearth of affordable entry-level projects, the expected launches of mass market projects like Centris at Boon Lay MRT station, Ferraria Park at Flora Drive/Road and the apartments in a mixed development at Yew Tee MRT station might just trigger some pent-up upgrader demand for these private residential homes.

The writer is senior manager, CBRE Research