Chart of the Day: Property market raises red flag from a sharp rise in vacancies

Borrowing rates have also started to climb.

Vacancies in 4Q14 were the highest in nine years, a clear sign that pent-up demand in recent years has been fully satisfied.

According to a report by Maybank Kim Eng, despite their negative correlation with vacancy rates, rental rates have been fairly resilient so far. They believe this can be credited to fairly manageable mortgage burdens as interest rates are low.

But things could soon change as borrowing rates have started to climb. To protect their cashflows, landlords could start to drop rents. Marginal owners may start to put up their properties for sale. Price declines could accelerate.

Here’s more from Maybank Kim Eng:

With the recent uptick in 3M SIBOR, mortgage servicing could become tougher, especially for landlords whose units remain vacant. At a financing cost of 1.5%, which is 1.0% above the 3M SIBOR, monthly payments for a SGD1m 30-year housing loan are SGD3,451. After the recent 50bp rise in this benchmark rate, repayments would have already increased by SGD245 or 7%.

As interest rates normalise, mortgage burdens will become heavier quickly. Consequently, we expect more home sellers in the market in the coming months. Amid weak demand, they could be forced to drop asking prices. With competition from the secondary market, property developers could follow suit for their newhome sales.