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Dynamics of Condominium Market in Singapore

Dynamics of Condominium Market in Singapore. SINGAPORE PROPERTY RESEARCH FORUM Theme: Property Issues Close to Heart. Dr. SING Tien Foo Centre for Real Estate Studies (CRES) Department of Real Estate School of Design & Environment National University of Singapore Date:31 August 2002.

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Dynamics of Condominium Market in Singapore

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  1. Dynamics of Condominium Market in Singapore SINGAPORE PROPERTY RESEARCH FORUM Theme: Property Issues Close to Heart Dr. SING Tien Foo Centre for Real Estate Studies (CRES) Department of Real Estate School of Design & Environment National University of Singapore Date:31 August 2002

  2. Outlines of Presentation • Introduction • Condominium Market in Singapore • Literature Review • Theoretical Framework • Condominium Housing Market Structure • Empirical Model Specification • Empirical Analysis & Data • Data Source • Empirical Results • Simulation Analysis • Conclusion

  3. Introduction • Condominium housing is the largest private residential property market in Singapore • It accounted for 38% of the total available private residential stock (Figure 1) • Together with apartments, non-landed constituted 2/3 of the accumulated stocks • By ownership status, 66% of the total 193,319 units of completed private residential properties in Singapore (as at 2nd quarter 2001) • 74.8% of the condominium & apartment units owned by Singaporeans • Owning private residential properties is every Singaporean’s dream

  4. Fig 1: Ownership of Completed Private Residential Properties by Type (As at end 2nd Quarter 2001)

  5. Historical Condominium Price Trends • Divergence of prices and monthly income especially from 3Q94 to 2Q96 • Quarterly compounded growth figures (3Q94 – 2Q96): • URA condominium price index = 19.5% (Figure 2) • Average all industries’ monthly earnings = $5.92% • Serious concern on the affordability of private residential properties • A slew of deliberate anti-speculation measures imposed by government on May 15, 1996 to stamp out speculative activities • Two key measures: • Imposition of a 80% loan to value limit on mortgage • Stepping up of supply via government’s land sale program – to increase supply from 6,000 to 7,000-8,000 units per annum

  6. Fig 2: Historical Condominium Price and Return Trends Source: URA

  7. Land Sale Policy Instruments • The land sale program in May 1996 and the slowing down in demand caused by the recession in 2001 sent the market into doldrums • 18,205 uncompleted units with sale licenses remained unsold as of the 2nd Quarter 2001 • In the off-budget measures announced on 13 October 2001, land sale program is used against to regulate the market movement • The land sale has been deferred/halted to tighten the supply and to shore up the sluggish property market • Market intervention via land sales and mortgage rationing have been adopted from time to time to smoothen undesirable market volatility • How effective and how long would the measures take to influence the market movement? – An important policy question

  8. Property recovery depends on economic recovery – Mr Mah • “Off-Budget measures to stabilise the property market will not have an immediate effect, but will help boost confidence and help the real estate industry ride out the downturn.” • “The measures will not on their own help the real estate industry to recover. Ultimately, the recovery of the real estate sector will depend on the recovery of the economy as a whole.” Mr Mah Bow Tan, Minister for National Development At the 42nd Annual Dinner of the REDAS Reported in Business Times (by Kalpana Rashiwala) 10 November 2001

  9. Motivation of Study • Motivation of study – • To understand the market dynamics of the condominium markets • To examine economic & property market forces that drive price, demand and supply of the condominium market • Earlier studies in Singapore – Ho and Tay (193), Ho and Cuervo (1999) and Tu (2001) • Three main differences in this study • It focuses on private condominium market • It empirically tests the effects of the May 1996 anti-speculation measures / policies • It simulates the exogenous shocks of variables and analyses the effects of changes in these variables on the market dynamics

  10. Condominium Market in Singapore • Condominium housing concept was brought into Singapore in 1974 • High-rise & high-density living with recreational facilities • 1970s slow take-off due to unfamiliarity of the condominium living & lack of knowledge of owner’s preference • The demand and popularity of condominiums rose in the early 1980s • Rapid economic growth • Influx of multinational corporation & foreign talents • Relaxation of the Central Provident Fund rule to allow members to draw on the Approved Residential Property Scheme (ARPS) to purchase private properties • The 1985 economic recession caused a market slump that was beset by excessive supply and declining demand • Economic forces and their effects on the condominium market

  11. Historical performance of Condominium Market • After hitting the trough in 1985, prices rebound in 2Q86 with a 2.09% quarter-to-quarter growth • Prices peaked in 2Q1996 with an 11.70% jump in quarterly price index (Figure 2) • Government introduced anti-speculation measures to cool the market in May 1996 • The first reversal of the upward trends occurred in 3Q96 and hit the trough in 4Q98 • Price declines aggravated by the 1997 financial crisis – ranged between –7.15% and –10.08% in 1998 • Supply surplus culminated in 4Q1997 – government’s stepping up of land sale program • From 5,870 units (95) to 10,472 units (96) and 16,471 units (97) • Stock were depleted rapidly between 3Q1997-4Q2000 due to pent-up demand by public housing up-graders (Figure3)

  12. Fig 3: Historical Take-up and Commencement of Condominium Housing

  13. Overseas Housing Market Literature • Extensive housing studies in UK & North America • Earlier studies place significant emphasis on data coherency and neglect theoretical underpinnings • Micro-foundation of empirical housing models • Neo-classical equilibrium framework • Davidson, Hendry, Srba and Yeo (1978) and Hendry (1984) • In classical Hendry’s cubic excess demand model, existing housing prices is a function of personal disposable income, rental rate, interest rate, mortgage stock, tax rate and number of families • New housing (Dicks, 1990), Investment Demand (Hsieh, 1990)

  14. Different Housing Models • Investment-based model – Marshallian’s marginal rate of return concept • Topel & Rosen (1998), Mortgomery (1996) • Incorporating Stock-flow process • Wheaton and DiPasquale (1994) • User cost of capital concept • Dougherty and Van Order (1982), Poterba (1984), • Credit rationing effects • Breedon and Joyce (1992), Meen (1990, 1995, 1996) • Ad-hoc model - Smith (1969)

  15. Singapore’s Housing Literature • User cost of capita model (Tu, 2001) • Single equation cointegration model (Ho Cuervo, 1999) • Two-stage least square model (Ho and Tay, 1993) • Price discovery between private and public housing markets (Ong and Sing, 2002) • Inflation hedging characteristics of private residential properties (Sing and Low, 2001; Chen and Sing, 2000) • No econometric modeling on condominium market • Effects of land supply and credit rationing policies on condominium market dynamics are not examined

  16. Theoretical Framework • Condominium housing market structure (Figure 4) • 5 key players in the real estate markets • Government • Management of macro-economic policy & regulatory role in development planning & control • Firms • Output performance translated into higher stock prices • Increased in remuneration of staff & employment • Financial institutions • Origination of mortgage loan –Households • Changes in demographic patters and user costs of capital • Consumption & investment demand of housign • Developers • Construction starts and costs management

  17. Macro-Economic Shocks: Gross Domestic Products Money Supply Exchange Rate Stock Market Volatility Expected & Unexpected Inflation Tax Rate/ Regime Term Structure Changes Foreign Reserve Government Development Planning & Controls / Macro-Economic Policies Development Financing Housing demand: Demographic changes Wealth & Disposable Income Appreciation of asset prices Stock market investment Housing stocks & expectations Others Space demand: Business Expansion Industrial Output Increases Rising Stock Prices Low Interest Rates Others Developers Households Firms Housing Supply: Profits Construction cost Land cost Cost of capital Capital Asset Investment & Holding: Risk Premium& Diversification Optimal Portfolio Residential Space Market Residential Capital Market Construction Mortgage Financing/ Securitization New Completion Existing Supply & Vacancy Financial Institutions Deposits Interaction & Market Equilibrium Condominium Housing Market Structure

  18. Empirical Models Specification • Empirical Model Specification(Table 1) • Equilibrium framework – Demand & Supply side factors • Three structural equations: • Demand model HDt =  (GDP, HF, IR, CPI, STI, P)t-i • Supply Model Supply, HCt =  (BMC, LRC, PLR, P, HS, HC)t-i • Price Model Price, P* =  (GDP, HF, IR, CPI, STI, Pt-i, BMC, LRC, PLR, HS, D96Q4)t • D96Q4 is a time dummy variable that represents the policy effects of the May 1996 measures (80% credit limit and planned increase in supply)

  19. Key Model Variables

  20. Empirical Analysis & Data • Quarterly economic and condominium market data were collected for a 12-year sample period from 1988 to 2000 (Table 2) • Five main public sources: • URA, MAS, DOS, BCA, ROM • Data limitations • No time-series data on mortgage stocks, historical tax rate, rent variables, household disposable incomes • Condominium stocks is I(2) • Data are I(1) stationary – conversion of the data into log-differenced series • Empirical Results (Table 3)

  21. 2SLS Multiple Regression Results • See Table 3

  22. Summary of Empirical Results • Price model • Last quarter inflation rate, last two quarters stock market returns and current housing stocks have positive effects no condominium price changes • Negatively related to 2-quarter lagged housing stocks and contemporary mortgage rate • D96Q4 is significant – the anti-speculation measures have dampening effect on prices • Demand model • Negatively related to 2-quarter lagged price change, 1-quarter lagged stock price change, demand in two previous quarters and 1-quarter household formation • GDP and inflation in the previous quarter have positive effects on demand • Supply model • Negatively related to last quarter housing stock, prime lending rate, and construction commencements two quarter ago • Also adversely affected by the last 2-quarter labor costs

  23. Simulation Analysis • Assuming that coefficients for the price, supply and demand model determinants remain unchanged • Ex-post predicted demand and new supply of condominium stocks are simulated • Ex-post predicted surpluses and actual surpluses are shown (Figure 5) • Supply surplus is defined as the difference between new condominium commencement & occupied housing stock • Expected predicted surpluses (374 units) against expected actual surpluses (historical) (633units) • Predicted new supply 1,310 (predicted surpluses = 28.56%)

  24. Fig 5: Actual and Predicted Surpluses (Shortfalls) in Condominium Stocks

  25. Simulation Results

  26. Shocking the Exogenous Variables • One standard deviation shocks on exogenous variables in the demand and supply models • Monte-Carlo simulation analysis • 42.10 % probability that historical oversupply condition (surpluses) in the condominium market would improve, i.e. will drop below the expected surpluses of 374 units (Figure 6) • Market clearing condition is most sensitive to lagged quarter condominium stock shocks • Other sensitive factors are 1-quarter lagged inflation rate and GDP growth and prime lending rate

  27. Conclusion • Land supply and mortgage rationing on loan quantum have been effective as policy tools to regulate condominium demand and supply in Singapore • There were significant corrections of prices in the 4Q96 and 1Q97 • 1% increase in mortgage rate will cause the current condominium price to drop by 0.46% • 1% increase in condominium housing stocks will dampen the condominium price by 0.85% two quarter ahead • On demand, GDP growth and inflation rate are positive signals for new demand • Demand is inversely affected by lagged quarter stock price and 2-quarter house price and demand in the previous 2 quarters • For new condominium commencement, the last quarter housing stocks, prime lending rate and new construction commencement have adverse effects on supply Thank you

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