Why 2014 will witness an inflexion of home prices

Prices to retrace by 5%.

According to DBS, it expects private home prices to retrace by 5% next year, with a through-the-cycle correction of 15% over the next three years and primary transaction volumes to dip a further 10-20%, despite a 32% y-o-y reduction to date.

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Anecdotal evidence is showing slower transaction volumes in both the public and private markets amid deceleration in price momentum. In the HDB resale market, average cash premiums for secondary market sales have also retraced back to 2010 levels, with a greater number of transactions being concluded at below independent valuers’ valuations.

These are signs that a market correction is imminent. With new completions boosting supply in coming years, vacancy rates have and are likely to continue to rise, thus putting pressure on yields. This, combined with a scenario of interest rate hike in the medium term would push yields into negative territory.

While we think that the risk for further policy action in the near term is low, as the impact of the debt service ratio implementation and incoming supply is still being digested, we also don’t expect room for potential policy reversal in 2014.

While residential assets as a percentage of Singapore resident household assets have dipped slightly to below 49% in 3Q13 (from its peak of 49.5% in 4Q12), total debt-to-asset value has remained high at 16.1%, and mortgages from financial institutions as a percentage of private residential properties has continued to rise to an all-time high of 39.5%.

From the perspective of the listed developers, slower volume demand and capped upside in product prices would likely result in margin erosion and lead to lower land prices or they may become more selective in product offerings. Under this environment, we believe developers who adopt a quick asset turn strategy would weather this environment better.