Cablegate: A Bubble in Singapore Property Market?

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RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHGP #0001/01 0040846
ZNR UUUUU ZZH
R 040846Z JAN 10
FM AMEMBASSY SINGAPORE
TO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/SECSTATE WASHDC 7606

UNCLAS SECTION 01 OF 02 SINGAPORE 000001

STATE PASS USTR

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV SN

SUBJECT: A BUBBLE IN SINGAPORE PROPERTY MARKET?

1. (SBU) Summary: Despite Singapore suffering through its most
serious recession in decades, the local property market saw a strong
surge in 2009 that has fueled concerns a new asset bubble could be
forming. The resurgent demand is due to a number of factors,
including pent-up demand remaining from the last run up in housing
prices, improvement in the global economic outlook, low interest
rates, strong household balance sheets, and an increasing view of
real estate as an attractive investment asset. Concerned over the
buoyant buying activities and price surge in the private residential
real estate market, the government unveiled measures in September
aimed at cooling the market and pre-empting a speculative bubble. So
far, the measures have succeeded in dampening sales, which have
slowed since July. The GOS is monitoring the market and still has
other administrative measures in reserve to deal with a bubble if
necessary. Real estate analysts say prices are not in bubble
territory yet, but still see upside potential, particularly on the
luxury end of the market. End Summary.

Rapid Recovery in Residential Real Estate
-----------------------------------------

2. (U) Despite Singapore's worst recession since independence in
1965, the residential real estate market has been booming this year.
After an initial drop in prices early in the year during the time
of greatest economic uncertainty, demand for private residential
real estate in Singapore has since witnessed strong growth. The
number of new private homes sold surged from a low of 108 units in
January to a record high of 2,772 units in July. Slightly over
14,000 units sold from January to November, exceeding the 4,300
units sold for all of 2008, and may surpass 2007's record sales of
14,811 units.

3. (U) The surge in demand has driven prices upward, with prices of
non-landed private residential real estate (condominiums and
apartments) rising 15.9% during the third quarter of 2009 compared
to the previous quarter. The Monetary Authority of Singapore (MAS),
the de facto central bank, disclosed in its November Financial
Stability Review that speculative activity in the property market
had approached levels during the 2007-2008 property boom, though had
yet to reach levels seen in 1996-7 prior to the Asian Financial
Crisis. They also noted reports of long queues to purchase units at
new property developments and entire development projects that had
sold out within days. The MAS concluded that "the risk of a renewed
escalation of speculative momentum cannot be discounted."

Popping the Bubble
------------------

4. (U) In September, Minister of National Development Mah Bow Tan
unveiled a series of administrative measures aimed at pre-empting a
speculative bubble and ensuring a stable property market. The
government removed its Interest Absorption Scheme which allowed
buyers to defer payments on purchases of properties that are still
under construction. The government also disallowed loans that
required only interest payments for the first years of the loan.
These two loan programs had often been used by speculators to
purchase properties and later flip them at a higher price with
little financial outlay of their own. The government also added in
more land to its yearly land sales to developers to boost supply,
and decided against extending assistance programs for land
developers that had been included in the 2009 budget's special
stimulus package. If further measures are necessary, a local
analyst said the government could curb home prices by further
limiting how much a property's price can be funded with a bank loan,
from 80-90% now.

5. (SBU) Leonard Tay, Director of Research for property firm CBRE,
told Econoffs that the government measures had some impact and that
an unsustainable bubble was unlikely to form. Tay said the
government had built experience dealing with asset bubbles and would
be more likely to employ the measures it had at its disposal if a
new one were to form. Unlike during the 2007 real estate boom that
leaned toward the luxury market, the current boom is driven by
entry-level properties and the soaring prices are affecting the
average citizen's ability to buy a home. With a general election
due by 2012 but likely to take place as early as mid-2010, Tay said
the government will want to keep asset price inflation in check.
Housing sales have cooled since the summer, but Tay predicted prices
were unlikely to fall as there were relatively few new property
developments coming on line in 2010. He added that potential exists
for further price escalation in the luxury segment of the market if
foreign investors actively participate in the rally.

Demand Drivers
--------------

SINGAPORE 00000001 002 OF 002

6. (SBU) Tay attributed the rally in the residential real estate
market to a combination of factors. There was pent up demand from
buyers who had been priced out of the market during the residential
real estate boom in 2006-2007, and the drop in prices early in the
year lured many buyers back to the market. After the worst of the
recession had passed early this year and the stock market began to
recover (up 90% since March), consumer and investor confidence
returned. The investment confidence combined with a healthy
distrust in other financial instruments that failed during the
recession, making real estate a more attractive asset to hold. Low
interest rates globally and in Singapore made the units that much
more affordable. Adding new debt during a recession would
ordinarily be a concern, but the MAS cited data showing Singapore
households entered the economic crisis with relatively strong
balance sheets. In the third quarter of 2009, the ratio of household
debt to GDP stood at 72%, below the long run average of about 80%.

7. (SBU) Although the current surge in the residential real estate
market has been driven mostly by domestic buyers, the boom has lured
foreign buyers into the market as well, led by Indonesians,
Malaysians and mainland Chinese. According to the MAS, the share of
foreign individual buyers and companies purchasing Singapore
residential real estate has been rising, reaching 12.5% in the third
quarter, up from 8% in the second. Vikrant Pandey, Senior Investment
Analyst in UOB Kay Hian Research, told Econoffs that many of these
foreign buyers, especially Indonesians, bought in on the luxury end
of the market. Many are seeking a stable investment location to
park their assets during the current crisis. Vikrant added that the
Singapore property market is attractive to cash rich mainland
Chinese buyers as unit prices here are generally 30% below their
counterparts in Hong Kong.

EHRENDREICH

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