In 2003, China’s GDP contributed just 4% to the global GDP, but by 2018 was closing in on 16%. That is not the only difference. Two other key differences are:

• Global supply chains to and from China dominate global trade
• Chinese capital and human flows to the region have multiplied many times over. Therefore, while SARS was an “unknown unknown” then, for the real estate (and some other economic sectors) market today, the viral outbreak can also be said to be an “unknown unknown” event (but a “known unknown” to healthcare workers and the government)

In our Q3/2019 briefing, we mentioned that the URA PPI had the greatest probability, historically speaking, of stringing together six consecutive quarters of growth in the up-phase of the cycle and if it turns before that, it is likely to be triggered by something different from historical factors that affected the index. For this current upturn, the URA PPI has already risen for three consecutive quarters, beginning Q2/2019. If the past was not disconnected or stretched, then the index should carry on rising until at least end of Q3/2020. So, all eyes will be on Q1/2020 price data and if it comes down sharply, it will be one of two possible cases. The first is serious in that the break is analogised to a hole having formed in the market structure (topology). This hole has punctured or disconnected the market topology and no reasonable number of scenarios being formulated (under various factor changes, e.g. GDP, interest rates, immigration rates, government interventions etc.), prior to the outbreak can give a satisfactory outlook under current conditions. Until that hole is plugged, the various market scenarios will not pan out. In other words, it is an exercise in futility to try to crystal ball what the market will be doing during this viral outbreak period.(See Figure 2)

So has that hole formed? For that, let us look at human behaviour. Unlike SARS where fatalities were occurring in frequency, the current outbreak in Singapore has so far not yielded any fatalities or if there are any, there will be few (but, this is dependent on factors within the domain of the healthcare system). As a result, the public is presently not able to assign a probability on death happening to them. This foggy outcome means that rationality still holds in the market. (To put it another way, if you knew that winnings in the coming lottery draw have snowballed to S$12 million, even if the chances of winning were very small, the queues to buy the tickets would be very long. But if an experiment is done whereby the public is not told the size of the winnings, but only that something of great value can be won, the queue is likely to be much smaller.) Therefore, if rationality continues to hold, then the pre-existing market topology is still intact. It is just warped.

The trillion-dollar question then is: will there sooner or later be a puncture in the private residential market topology or will it continue to be warped? Our view is that until mid-February 2020, the market topology had only been stretched, though stretched thinly. For the OCR and RCR, it has not torn, at least for now, but as of the date of this writing, the stretching is continuing. For the super high-end market in the CCR, we believe that, for the moment, there could be a puncture because Chinese buyers are now not easily able to move freely (until the outbreak is over). Our definition of a market puncture or disconnect will be one where the tell-tale sign is even with sharp price discounting, and demand remains anaemic and unresponsive. At the time of this writing, the OCR, RCR and CCR (those priced <S$3,000 psf) new launch markets could just be stretched.

Partial evidence of this stretching is obtained from two recent launches, The M condo and Luxus Hills. The 70% sales achieved for The M condo over the first weekend of launch and the 64% first week sale numbers for Luxus Hill (Contemporary Collection) were what outsiders to the residential property industry did not expect. To them, it was counterintuitive and astounding. Although the sale numbers were good and, making a judgement call, we believe that if there had been no Covid-19 outbreak, either the percentage sold would be significantly higher or the prices could be greater. If we accept this judgement call, then we can say that the market landscape in terms of prices and demand has merely been stretched. Why do we say that the pricing topology has been stretched? Our simple hedonic model appears to impart that inference. (See Figure 3 for the concept of the market topology being stretched.

As virology and containment measures are not topics within our expertise, we will not hazard any guess as to whether it will get worse from here. If it does, the likelihood of a puncture in the market topology cannot be discounted. But for now, given that the topology for OCR, RCR and non-super luxury CCR new launches does not appear to have become disconnected, and arising from the high land cost for most of this year’s launches, developers will have to sell their developments at prices above comparables in the surrounding areas. We will still hold to our pre-Covid-19 view that prices would rise 3% to 5% in general for the year. But for Q1/2020 and even Q2/2020, price indices may turn soft due to marketing strategies adopted to whip up initial sales. Also, the dearth of transactions and the withholding of new launches would mean the indices are being influenced more by resale transactions. Under duress, resale prices may yield to pressure.

To get a better handle of the market structure post-Covid-19 outbreak, we will have to stand aside until the market distortion is over and, in a worst-case scenario, should be become disconnected, then only after which, can we begin reconstructing a new forecast.