Dynamics of Condominium Market in Singapore SINGAPORE PROPERTY RESEARCH FORUM Theme: Property Issues...

Dynamics of Dynamics of Condominium Market Condominium Market in Singaporein Singapore

SINGAPORE PROPERTY RESEARCH FORUMTheme: Property Issues Close to Heart

Dr. SING Tien Foo Centre for Real Estate Studies (CRES)Department of Real EstateSchool of Design & EnvironmentNational University of SingaporeDate:31 August 2002

SINGAPORE PROPERTY RESEARCH FORUM 2002Jointly organized by Dept of Real Estate, SISV & SISV Services

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


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


5.05%10.32%

18.65%

65.98%

Detached House Semi-Detached HouseTerrace House Apartment & Condominium

Fig 1: Ownership of Completed Private Residential Properties by Type

(As at end 2nd Quarter 2001)


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


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Fig 2: Historical Condominium Price and Return Trends

Source: URA


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


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 REDASReported in Business Times (by Kalpana Rashiwala)

10 November 2001


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


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


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)


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


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)


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)


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


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


Government

HouseholdsDevelopers Firms

Financial Institutions

Development Planning & Controls /

Macro-Economic Policies

Macro-Economic Shocks:Gross Domestic Products Money SupplyExchange RateStock Market VolatilityExpected & Unexpected InflationTax Rate/ RegimeTerm Structure ChangesForeign Reserve

Housing demand:Demographic changesWealth & Disposable IncomeAppreciation of asset pricesStock market investmentHousing stocks & expectationsOthers

Space demand:Business ExpansionIndustrial Output IncreasesRising Stock PricesLow Interest RatesOthers

Construction

New Completion

Existing Supply & Vacancy

Residential Space Market

ResidentialCapital Market

Mortgage Financing/

Securitization

Capital Asset Investment & Holding:Risk Premium&DiversificationOptimal Portfolio

Housing Supply:ProfitsConstruction costLand costCost of capital

Development Financing

Deposits

Interaction & Market Equilibrium

Condominium Housing Market Structure


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)


Key Model Variables HD = Demand function represented by incremental change in

occupied condominium housing stocksHC = Supply function represented by the change in

commencement of new condominium housing stocks GDP = Gross Domestic ProductHF = Household Formation IR = Interest Rate for Housing LoanSTI = Stock Exchange All Share Price IndexP = Condominium Price IndexBMC = Basic Material CostsLRC = Labour CostsPLR = Prime Lending RateHS = Stock of Completed Condominium

HCt-i= Lagged period condominium housing Commencements


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)


2SLS Multiple Regression Results See Table 3


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


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%)

Simulation Analysis


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


Simulation Results

Certainty is 42.10% from -Infinity to 374.22 Predicted Surpluses

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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


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

Dynamics of Condominium Market in Singapore SINGAPORE PROPERTY RESEARCH FORUM Theme: Property Issues...

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