Lowering prices in property glut not so straightforward

Mr Tan Boon Huat assumes that if there is a supply glut in the property market, prices should be going down to reflect the demand and supply situation ("Dismay over call to ease property curbs"; last Saturday).

Unfortunately, things are not so straightforward.

Before the cooling measures were implemented, developers competed aggressively for land parcels and put in extremely high bids to increase their land banks.

The Government was partly to blame, for releasing too much land for residential development.

Perhaps a supply glut was predicted but no developer would have stayed idle when the property market was booming.

In some places, the boom was big enough to encourage higher prices from a lot of new supply.

All this simply fed speculative activity, which has made the bursting of the bubble much more painful.

It was a case of bad judgment and false euphoria, in the belief that what goes up will not come down, or will come down gradually.

It was an unfortunate bet against the odds.

How can developers, who bought land at above market price, sell the units at below cost now?

Experienced developers with sufficient buffer would probably take a longer-term view on whether to cut prices.

But developers that need to recapitalise, or whose core business is not in residential property, may be forced to reduce prices to cut losses.

Demand from first-time buyers and upgraders, groups which usually lubricate the housing market, has also taken a hit as banks tighten credit standards.

Elasticity is not always a good thing because when the housing market can respond to demand by adding to supply, there is a greater risk of overbuilding.

In theory, booms in an elastic market do not last long because as new housing becomes available, it puts pressure on prices, puncturing the expectation of further appreciation and bursting the bubble.

Francis Cheng

A version of this article appeared in the print edition of The Straits Times on February 23, 2016, with the headline 'Lowering prices in property glut not so straightforward'. Print Edition | Subscribe