New home prices likely to remain unchanged: Experts

260520 - New Home Price unlikely to Drop

Buyers have the upper hand in a weak economy, say experts, and developers and contractors are expected to take this into consideration. And while, in principle, contractors will have to bear the additional costs of safe distancing measures, the authorities are working out how costs can be spread among the different parties involved.ST PHOTO: KELVIN CHNG

Prices for upcoming Housing Board (HDB) flats and private properties will likely remain the same despite an inevitable hike in construction costs, said property analysts.

Developers may absorb the additional costs or get contractors down the line to do so, instead of raising property prices, as buyers have the upper hand in a weak economy.

National Development Minister Lawrence Wong, who co-chairs the multi-ministry task force dealing with the Covid-19 crisis, said on May 15 that measures to keep Covid-19 transmission low in the construction sector are bound to increase costs for contractors.

Contractors will have to bear these additional costs in principle, he said.

The construction sector can gradually resume operations from June 2, adhering to stringent safe distancing measures.

Projects will be given the green light to restart only when contractors demonstrate that they can implement the requisite safeguards.

Construction workers will be regularly tested for Covid-19, at a proposed interval of two weeks.

Though the costs will be borne by employers in principle, the authorities are working out how costs can be spread among the different parties involved, though they did not specify the parties.

Analysts say construction costs will go up primarily because of these measures, although it is still too early to see their full impact.

Property analyst Ong Kah Seng predicts that construction costs for private condominium projects may increase by 7 per cent to 10 per cent this year, going by a “fairly conservative estimate”.

This translates to an increase of 2 per cent to 3 per cent of the property’s selling price, although Mr Ong said most private developers are generally prepared to absorb most of this cost.

Property analyst Ong Kah Seng predicts that construction costs for private condominium projects may increase by 7 per cent to 10 per cent this year, going by a “fairly conservative estimate”.

Since the start of the outbreak earlier this year, most buyers have turned very prudent and price-sensitive, he said.

“Already, the economic recession is highly dampening buyers’ purchasing power and long-term mortgage servicing capabilities,” he said. “As long as buyers notice prices have increased compared with pre-circuit breaker period, they are likely to walk away from the table.”

Mr Nicholas Mak, head of research and consultancy at ERA Realty, said buyers have “more bargaining power” in a weak economy, as developers face increased competition from shrinking demand.

“Developers know it’s tough times ahead for them, so they wouldn’t want to pass on the higher costs to buyers,” he said.

However, he said luxury condominiums that are on the higher end of the price spectrum may see some slight price increases, as developers “have a wider price range to play with”. “But we’ll never really know how the additional costs will be ‘massaged’ into the final pricing. For example, the condo developer can put in more fancy fittings like a branded tap or dishwasher to justify raising the selling price slightly.”

Around three-quarters of private housing developers in Singapore use third-party main contractors, said Mr Mak.

Increase in construction costs will usually not eat into developers’ profit margins as most projects go by a lump sum contractor fee, negotiated prior to the start of the project.

Any additional costs typically would have to be borne by the contractors.

Mr Ong agreed, adding that this would especially be the case for those with longstanding working relationships with the developers.

For upcoming Build-To-Order projects, Mr Mak said it is not likely that prices will significantly increase as HDB has the advantage of economies of scale as Singapore’s largest housing developer.

Even if there is a price increase, he predicts that it would be no more than “a few thousand”, as there are political implications to consider.

“HDB flats are meant to be affordable to meet the aspirations of new families and couples, so the Government cannot raise the prices too much,” Mr Mak said.

“Furthermore, it is an election year, so it’s unlikely they’ll do something that’s too unpopular.”

While it is good news for home seekers, some construction companies are worried that absorbing the increased cost will put them out of business.

Mr Lee Zhenkang, 29, project manager at G1 Construction, said the company has shelved all its upcoming projects for now, as he is unsure if it has the capacity to fulfil them, given the strict measures.

“For smaller companies like us, it’s a matter of survival now. If you take on a project and can break even, you’re one of the lucky ones. If not, you lose money,” he said.

“There are testing costs for workers and material costs, which are expected to rise. Can my sub-contractors meet their obligations? Can we get new work permits and foreign workers? There are too many unknowns.”

Associate Professor Lawrence Loh, director of the Centre for Governance, Institutions and Organisations at the National University of Singapore, said land cost typically makes up more than 50 per cent of a private developer’s costs.

Construction cost, which includes labour costs, is the second-largest expense at around 25 per cent.

However, the picture is not as grim as it appears to be, as the Government can choose to step in to make adjustments, Prof Loh said.

“Land costs and foreign worker levies are two policy tools that the Government can adjust to help developers manage their costs,” he said.

Foreign worker levies for March and last month have been waived, as part of measures to provide businesses with more support.

Said Prof Loh: “The Government will have to carefully consider the fiscal implications of making those adjustments, but at the moment, nothing is yet cast in concrete.”

Updated from : The Straits Times, 26 May 2020