Property pressure: What you need to know about falling residential prices

Prices will see a double-digit dip in FY 12-13 - but by how much exactly?

According to OCBC, residential prices likely to fall 15%-25% over FY12-13.

Here’s more from OCBC:

We believe that lower GDP growth in FY12-13, coupled with curtailed foreign demand due to recent policies, would reduce residential demand significantly. Supply remains abundant with ~49k unsold units in the pipeline – about three years of supply at the current rate. Moreover, with ~40% of the total 86k-unit pipeline attributed to GLS units, developers would have limited flexibility delaying launch schedules even as sales slow ahead. Major risk to our forecast comes from sustained low interest rates boosting monetary growth and hence residential demand more than we anticipated.

Less visibility beyond FY13. Further downside risks beyond FY13 would come from a heavy completion schedule outpacing population growth. At that juncture, falling rentals and prices could further reduce primary demand, and also prompt unsterilized selling (adding to supply without a corresponding addition to demand) of investment residential units in the secondary market, further cannibalizing primary market demand. However, should residential prices swing excessively to the downside, we see the government potentially reversing its cooling stance – in line with its long-term counter-cyclical philosophy. Also, in the event that the economy picks up rapidly over FY13, accompanied with sustained low interest rates, a rapid rebound in residential prices could also occur.

Our forecast priced into equity levels. We believe current share prices of the developers have already priced in 15-25% price dips, in line with our forecasts. This view comes from an analysis of developers’ share prices during the last residential downturn in 2Q08-2Q09, when the URA residential property index fell ~25%. Over 3Q98 to 1Q09, the FSTREH index traded at an average 0.8 times trailing book value. In comparison, note that trailing price-to-book values are currently at 0.6 times.

Stronger balance sheets than the last time. Moreover, the balance sheets of major developers are stronger than those before the last crisis, with lower debt gearings and higher cash balances in general. This should buttress developers during period of low physical prices and sales, and reduce the likelihood of recapitalization. All things considered, we think that developers’ share prices have already priced in residential price dips near the bearish end of our forecasts.