PRIVATE home prices in Singapore could fall a further 10 per cent from current levels over the next two years, French bank BNP Paribas said in a research report yesterday.
Although prices have fallen 5.5 per cent from their mid-2013 peak, BNP Paribas said that a "closer look at valuation metrics and underlying drivers" shows the market has to correct further before a bottom can be called.
The bank said the Singapore Government is unlikely to unwind the total debt service ratio (TDSR) cap, given its effectiveness in curbing property demand and supporting long-term financial stability, while households here face further deterioration in their disposable income with local interest costs set to rise in tandem with US rates.
Due to initially low interest rates, the pace of increase in interest servicing will likely exceed that of income growth, said the bank. In turn, fewer households are likely to meet the TDSR requirements.
"Consequently, the persistence of this measure, while positive for financial system stability, is a key constraint to the revival of property demand in Singapore and, by extension, the outlook for prices," said the bank.
"Our central case is for a relatively orderly unwind. Maintenance of 5 per cent per annum household income growth and a two-year period of correction (based on previous property cycles) means that prices need to fall by 10 per cent over the coming two years to lower the price-to-income ratio to 8.5 times," said the bank.
The continued fall in property prices will have direct consequences for consumption growth, said BNP Paribas.
"Such a decline will push up loan-to-value ratios and force households to inject fresh capital into their mortgages when they attempt to refinance, further constraining private consumption in the coming years."
The bank added that another factor, tighter immigration policies, has also had a detrimental impact on demand for housing.
It said vacancy rates for private non-landed housing could hit 10 per cent by the end of this year - putting more downward pressure on prices and rents - given the Government's tighter immigration stance, slowing regional growth which has dimmed the incentive for multinationals to expand into Asia, and supply of units in the pipeline.
BNP Paribas said the only way the Singapore Government can reverse the downward trend in property prices is by curtailing supply but "judging by its actions, however, the Government seems intent on facilitating further acceleration in supply".