Sector’s downturn manageable, says Citibank report

PRIVATE home prices are on a downslide, but their decline is unlikely to have a major impact on the economy, according to a new report by Citibank.

More than 80 per cent of Singaporeans live in public housing anyway, which is still on a price uptrend, it said. HDB resale prices rose 4.2 per cent in the third quarter, while prices of apartments, condominium units and landed homes fell 2.4 per cent. This was the first decline in four years.

Even private home dwellers who see their property values dip are unlikely to cut back on spending, said the bank. Real estate wealth here is illiquid compared to other countries – meaning it cannot be easily converted to cash – so a fall in home values will have little effect on how much consumers spend.

Citibank economist Kit Wei Zheng estimated that a drop of 15 per cent in the prices of private homes could knock 0.4 to 0.6 percentage point off economic growth.

This would be due largely to lower construction investments as developers delay projects to wait out the downturn, rather than because home owners feel poorer and spend less, he said.

While ‘not negligible’, the effect of falling private home prices on the economy is ‘not particularly large’.

‘A housing downturn confined to the private residential segment should be manageable,’ said Mr Kit, adding that a slump in exports and financial services would have a more significant drag on Singapore’s economy, currently in a technical recession after two straight quarters of negative growth.

Singaporean home owners are often described as ‘asset rich, cash poor’, because they cannot or are unwilling to unlock the value of their property, Mr Kit noted. If they could do so, they would be able to turn the value of their homes into cash for spending.

Unlike in bigger countries, Singapore has no ‘cheap’ suburbs where people can buy a similar or even better house and sell their existing one in the city for capital gains, he said.

Singaporeans also tend to have a ‘psychological reluctance’ to realise the value of their property by downgrading to a smaller, cheaper home.

In countries like the United States, financial instruments such as reverse mortgages allow home owners to get cash for their homes even while they are living in them, added Mr Kit.

With real estate here so illiquid, home prices are not directly related to consumption spending. In fact, the Citibank report says this relationship could be reversed in Singapore: Lower home prices could mean that aspiring home buyers have more money to spend.

Of course, a property downturn also means fewer home sales, which would hit economic growth more than a fall in home prices, Mr Kit said.

A drop in property transactions would eventually lead to a decline in business services, among other things.

Source : Straits Times – 11 Nov 2008

However, analysts continue to see strong demand for HDB flats

A 10-15 per cent fall in overall housing prices could shave 0.4 to 0.6 of a percentage point off annual GDP growth due to lower construction investments alone, according to Citigroup.

Using information from four previous studies, Citi analyst Kit Wei Zheng concluded that a 10-15 per cent fall in home prices means that overall construction investments – which make up 11 per cent of GDP – could fall by between 16 and 24 per cent from baseline after a period of five years, or roughly 3-5 per cent per year.

This would reduce GDP growth by about 0.4-0.6 percentage point each year.

‘This impact, while not negligible, is not regarded as a catastrophic outcome, and probably pales in magnitude to the export and manufacturing downturn,’ said Mr Kit.

Similarly, OCBC economist Selena Ling thinks a fall in private home prices – and subsequent fall in residential construction demand – will not have too large an impact on GDP. ‘There will definitely be some impact,’ she said.

‘But right now, the construction industry is driven more by commercial and industrial projects. Private residential projects make up just one part of construction demand.’

CIMB-GK economist Song Seng Wun said: ‘Some of the slack in private residential construction activity could be taken up by an increase in public sector demand.’

Private residential construction investments account for about one-fifth of total contracts awarded, and contributed around 13 percentage points to the overall 64.7 per cent growth in contracts awarded in the first three quarters of this year.

In contrast, public construction projects, including HDB projects, comprised 34 per cent of total contracts awarded and contributed 33 percentage points to growth in contracts awarded. They accounted for more than 50 per cent of overall growth.

Looking ahead, Citigroup property analyst Wendy Koh expects a further 25 per cent decline in the high-end residential segment. Prices in the mid-market could fall another 15 per cent, while the mass market could start to see a decline of 5-10 per cent.

The direct impact of falling private housing prices on private consumption spending – and therefore GDP – is also likely to be small, Citigroup said. For one, as housing assets are mostly illiquid in Singapore, wealth effects are largely absent.

Lower private home prices may in fact increase household discretionary incomes for spending on other items.

In addition, less than 20 per cent of Singapore’s population lives in private housing and therefore public house prices are probably more relevant for consumption, Mr Kit said.

‘Public residential construction demand has actually surged, given that public housing demand has remained robust so far,’ he said.

‘Nonetheless, we cannot rule out a fall in public residential construction demand going forward, if HDB prices start to plateau as well.’

Demand for HDB flats remains strong and prices are still on the uptrend. But a slowdown is expected, which could lead to lower public residential construction demand and have its own impact on GDP, analysts said.

Source : Business Times – 11 Nov 2008