Price growth of private properties hit an 8-year high in Q1.
The creation of new benchmark prices for private homes has caused Savills Singapore to revise their 2018 price forecasts from 12%-15% up to a whopping 15%-20%.
According to a report, new price premiums were achieved during the new launches of homes in the first quarter of 2018. Moreover, developers of previously launched projects have increased the prices for their remaining units.
Urban Redevelopment Authority (URA) data showed that the rate of change of the overall private residential property price index accelerated in Q1 of 2018, rising 3.9% QoQ. This was after modest increases of 0.8% in Q4 of 2017 and 0.7% in Q3 of 2017.
Moreover, this rate was the sharpest growth in almost eight years since Q2 in 2010, mainly due to price gains of non-landed private residential properties in the CCR (+5.5%) and OCR (+5.6%).
Similarly, the strong price rebound was found in the prices of the high-end, private condos (+2.9%) tracked by Savills. After a cumulative growth of 5.7% over four successive quarters since Q2 of 2017, the high-end average price stood at $2,383 psf in Q1 of 2018, only 1.9% lower than the most recent peak, which occurred in five years ago.
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So what is driving this sharp price recovery? Savills Singapore research & consultancy senior director Alan Cheong said whilst it appears logical to associate GDP growth with most business sectors, for private residential properties, it can also turn out to be an archaic correlation.
“Visits to show flats leave a discerning observer with the impression that an increasing number of buyers at new launches are funded in part by their parents’ i.e. baby boomers’ money,” he said. “This new engine of funding turns the economic correlation from a contemporaneous and/or forward-looking one to a multi-year, back-facing specification.”
Cheong noted that until the day Singapore’s ageing demography can no longer influence the market, housing demand may not necessarily be driven by traditional variables like interest rates, demographics, and future economic performances. Rather, historical GDP growth rates will increasingly play a part.
He added, "On top of that, theoretical investment function variables like interest rates, may, within bounds, lose their significance. The rearview mirror reflection of GDP represents the level of savings by the baby boomers. Therefore, unless we expand our frame of reference to include the past, we will continue to misread the market by ignoring the savings level of the population of potential buyers.”
He then introduced a ratio which divides the future launch of the value of private homes over the current value of private homes, a “modification” of Tobin’s q in economics. “In other words, when the future market value of the physical asset (the numerator) is greater than its replacement cost, the impetus is for both individuals and companies to invest. Although we have not conducted any empirical testing to confirm this for the private residential market, it conforms to what our marketing specialists are witnessing on the ground,” he said.
The concept of a Tobin’s q for private residential properties can also be illustrated in the collective sales market when the ratio can be modified to take into account the future sale prices of all en bloc units less construction costs over the current value of existing units in the en bloc site.
“A ratio >> 1 (>> means much greater) would start to whet the interest of some subsidiary proprietors to initiate a collective sale. This modified Tobin’s q is actually what collective sale specialists have been using to identify developments or pitch for appointments without knowing it,” he added.
Cheong noted that without extending this field of analysis to other factors, by focusing on these two alone, expect economic growth to be subdued compared to a decade ago whilst concerns about the ageing population increase.
“The manifestation of these issues may, however, for the medium term, be subjugated by the copious savings built up through the decades of high economic growth by the upper deciles of the households,” he added. “This, together with the ingrained expectation for price appreciation, built up over many years of witnessing private property prices increase to record levels, are likely to goad those with the wherewithal to invest in real estate.”
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