The URA monthly sales volume for private residential units (excluding executive condominiums) continued its rise in February, increasing another 29.0% m-o-m to 2,413 units! At this rate, we could be looking at over 25,000 units by end-2012. Is this possible? Probably not.

The strong showing is merely a post 8 December measure effect. Our study of previous measures has shown that the market typically rebounds within 60 days of a measure’s announcement, given the residual, but discretionary demand of about 900-1,000 units a month. As one would expect in any rational market, buyers typically delay making any major decision at least until the measure is somewhat better understood. Then residual buyers will usually return to the market in the second month after the measure comes into effect. In other words, one would expect demand to rise starting from the 31st day – (ok, I am just making my point, but in reality the market activity rebound is a more gradual process).

Taking a time-weighted approach, a total of 1,448 units was sold just 30 days before this latest round of stamp duty revisions was introduced on 8 December 2011, and subsequently volume dipped to 852 units in the following 30 days. With an assumed 900-1,000 unit latent demand each month, this means that there are about 48 to 148 units of unfulfilled demand waiting to return to the market. In the next 30 days, i.e. in February 2012, the transaction volume shot up to 1,926 units when, theoretically speaking, it should have been some 948 to 1,148 units. Why were there additional 700-900 units – equivalent to almost an additional month’s latent demand?

The 8 December measures effectively raised the bar to foreign entry to the residential market, and the resultant effect (intentionally or otherwise) was to encourage the return of local buyers. This demand was also helped by low financing costs, lack of alternative investment options, low total quantum cost coupled with developers’ continual support through absorption of stamp duty charges, furniture discounts and other incentives.

This strong market performance raises the risk of further measures but at this juncture it is unlikely we can expect any immediate government intervention. Overall property prices, as measured by the URA Property Price Index, increased by only 0.2% q-o-q in 4Q11, and secondary market activity also slowed. The bullish market performance is prevalent in the primary market only and, in my opinion, further measures are unlikely in the short term unless the volume of new sales continues to rise in March. Further measures, if any, would likely raise the effective interest rate on new housing loans and the property tax rate on investment in residential property.

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