3 factors you never knew could cut Singapore home prices by 40%

June 28, 2013 Leave a comment

3 factors you never knew could cut Singapore home prices by 40%

Staff Reporter, Singapore Published: 47 min 49 sec ago

Mortgage rates must rise to 3.5%.

According to CIMB, assuming 1) mortgage rates rise to normalised levels of 3.5%, 2) a benign housing rental growth, and 3) rental yield spreads over mortgage rates are kept at around 100bp (currently achieved), we estimate that residential property prices could fall by 30-40% from current levels with all else remaining constant.Here’s more:

In previous upcycles (e.g. 1995-1997 and 2006-2008), house prices and rents were still rising despite housing rental yields being in negative carry territories.

At the start of these upcycles, supply was tight, house prices were depressed and investment demand was on the rise. But the current upcycle appears to have the opposite attributes. House prices and rents are currently at historical highs.

Supply completions, both in the private and HDB segments, are expected to swell to new highs in 2013-16. Population growth, once driven by liberal immigration policies, is also expected to normalise with the recent population White Paper projecting a population of 6.9m by 2030, implying 80k-90k population growth per year.

This is about 40% lower than Singapore’s average population growth per year of 150k in the last seven years. At current house prices, we estimate rents would need to rise by 25% for rental yields to rise by 50bp.

We see limited scope for this to happen given the impending rise in supply completions and lower immigration growth. The current cooling measures put in place should also cap physical price growth from hereon, especially for the investment property market.

All these point to one conclusion – when mortgage rates rise, house prices are likely to fall.

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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