Morgan Stanley sees 8% home price hike in 2019 despite cooling measures

MORGAN Stanley has predicted an 8 per cent increase in private home prices in 2019 despite cooling measures introduced in July to tame the market, a projection that stands in stark contrast to other research houses' much tamer outlook.

The investment bank foresees a 2 per cent price increase each quarter in 2019, the bank said in a research note on Friday.

In comparison, DBS Bank's Derek Tan said that 2019 price is "likely to be flat or slightly down given the measures" as his base case, while RHB Bank predicted a 0 to 2 per cent increase for next year.

While it noted that "the market remains unconvinced about the housing market's near-term outlook", Morgan Stanley said that concerns about cooling measures, interest rate hikes and an economic slowdown were "overdone".

It said that home prices rose in four of the five previous rate hike cycles between 1993 and 2007 - and rising rates "tend to coincide with improving economic growth outlook, which supports housing demand".

Morgan Stanley also believes investors and foreigners will still buy amid cooling measures. Regarding local investors, which it says comprises 25 per cent of demand, Morgan Stanley said households' asset exposure to residential properties is low by historical standards.

"We believe property is still relatively under-owned as an asset class relative to other investments, and that households will generally not feel an urgent need to diversify their portfolios away from it", it said.

The bank also believes GDP growth will stand at 3.6 per cent in 2018 and 3.3 per cent in 2019, thanks to the recovery of Capex and private consumption.

Also supporting prices in the near-term would be "healthy demand" from HDB upgraders and en bloc beneficiaries and, "tight supply, as unsold inventory of 28,000 units (including project launches in the pipeline) are still below historical levels".

Morgan Stanley is also sticking to a thesis it first put forth last year that had surprised many in the market: that home prices here could double by 2030. Among other reasons given, it believes in the following:

• A rising household formation rate which has outpaced overall resident population growth in 2017 and a higher-proportion of high-skilled foreign labour;
• The Singapore economy will continue to outperform other advanced economies over the medium-term to support income growth and housing demand;
• There will be less pressure on homeowners to sell due to bequest motives, lease buyback schemes in the public housing market and delayed retirement. A DBS research report in May this year found that prices could rise to S$2,300 to S$2,900 per square foot by 2030, from May's S$1,500.

Though Tricia Song, head of research for Singapore for Colliers International, said: "We agree that in the long term the home prices should move in tandem with GDP and household income growth, but there are other factors, such as regulatory risks, socio-economic concerns that are harder to predict."

In the nearer-term, other analysts thought the bite of cooling measures and other factors have been more severe.

This year has seen private home prices rise between 3 and 4 per cent per quarter in Q1 and Q2, before slowing to a 0.5 per cent increase in Q3, according to URA's flash estimate.

JLL predicts prices to rise 8 to 9 per cent in 2018 and by 2 per cent in 2019, given the "significant supply in the launch pipeline and the softer demand following the July 6 cooling measures", said national director of research and consultancy Ong Teck Hui.

The measures were introduced to "to cool the property market and keep price increases in line with economic fundamentals". This suggests that if prices are to increase out of line with economic fundamentals, there will be intervention to moderate prices again, he said.

With the cooling measures, "naturally, there should be some form of reset in expectations, if not why did the en bloc market cool?" Mr Tan from DBS said.

Meanwhile, RHB's Vijay Natarajan said investor demand, which he pits to 30 to 40 per cent of the market, has been "substantially reduced" following cooling measures.

2019 could also see much supply from en bloc sales coming into the market. "That would be a lot of choices for the buyers. You wouldn't be able to price so aggressively," said.

"If the interest rate alone rose... but there was no cooling measures, yes, perhaps property (market) can still go ahead," he said. "But if you combine cooling measures with interest rates combined with slower growth outlook - there needs to be a bit of consideration on how prices can go up."

"We think in general home prices could remain flat in 1H19 and start recovering in line with the GDP in 2H19, by up to 3 per cent (compared to end-2018 prices), barring any external shocks," said Colliers' Ms Song.

Adapted from The Business Times, 13 Oct 2018.