Confine cooling measures to mass market homes, says analyst

We remain NEUTRAL on the property sector. The robust sales of 1,575 units (excluding executive condominiums - ECs) in May 2011 does not spell good news when you take into account 67% of sales came from Outside Central Region (OCR), synonymous with mass market homes. For the first five months of 2011, developers sold a total of 8,051 units (inclusive of 992 ECs). It even surpassed the corresponding period in 2010 by 4.3%. It is ominous that mass market homes account for only 39% of private home sales for the first five months of 2010 but an astounding 57% of new home sales for the same period in 2011 (even after stripping out ECs). This does not bode well for property investors considering that the government had introduced two sets of measures in February and August 2010 in a bid to 'cool' the overheated property market.

On a negative note, new sales of high-end residential (psf>S$3,000) has remained tepid. Developers sold 52 high end units for first five months of 2010, averaging circa 10 units per month. For first five months of 2011, developers sold 46 high-end homes, averaging only 9 units per month. This is a far cry from 217 high-end units clocked in July 2007 and is below our expectations. We had earlier predicted high-end homes to gather momentum in 2010. Nevertheless, we maintain our forecast of a 5-10% price increase for mid and high-end homes.

In spite of the likelihood of further government measures to dampen surging prices, it should be confined to mass market homes in our opinion. In contrast to OCR price index being 23% above its previous peak in 2Q2008, Rest of Central Region (RCR) and Core Central Region (CCR) are only 13% and 3% respectively above their previous peak. The latest and harshest set of measures by the government was in January 2011 when it imposed a sellers' stamp duty (SSD) on any resale transactions within four years of purchase. We believe the next crucial period to watch out for will be July/August 2011. If residential sales (particularly mass market homes) remain strong, the government may impose further measures such as upping SSD to 20%, lengthening the holding period for imposition of SSD to five years and lowering the loan-to-value limit to 50%. We noted that the Hong Kong government had recently imposed the last set of measures.

The government has been ramping up supply to temper exuberant home prices. It introduced 19 confirmed list sites and 24 reserve list sites under 2H2011 government land sales program (GLS). These sites can potentially yield about 14,200 residential units (including 2,300 ECs). As of 1Q2011, a sizeable 68,890 private residential units are in the pipeline with close to half (34,270 units) unsold. If we add in recent sale sites coupled with the confirmed list of 2H2011 GLS, the figure will be bumped up further to circa 53,000 units. We estimate that it will take the market approximately three and half years (based on 15,000 units per annum) to absorb the impending supply.

Moreover, the government is further raising public housing supply by another 14% to 25,000 units in 2011. With the much anticipated raise in monthly income ceiling from S$8,000 to S$10,000, it will further take some wind off mass market private homes. Mass market home sales have been dominated by Housing & Development Board (HDB) flat upgraders whilst permanent residents and foreigners have only recently started becoming more active. Going forward, HDB upgraders will either be daunted by the upward spiralling prices of new private homes or tied down by the minimum occupation period of resale flats.