Wednesday, 13 October 2010

The Property Bubble & Investment Trap Part X - External Drivers to Watch for Further Price Fall

I had delayed this posting to observe the market response to the 2 recent EC launches. As buyers flock to the Esparina and Canopy EC launches over the last 2 weekends, the first and second in 5years; what can we interprete off these "signals" from the current market since those control measures were implemented in End August 2010.

The Financial Quotient (FQ) of these buyers must have been fully stretched if these signals were indeed to be representative of their sentiments for the EC sub-market.

The following are my general observations of the whole property market thus far :-

(1) Falling prices in land bids by developers
(a) Fall in price of DBSS land bids by about 10% to a base of about $220~$230 psf ppr.
(b) Fall in price of EC land bids by about 20% to about $230 ~ $ 240 psf ppr
(c) Fall in price of Private Mass Market Condo land bids by about 10%~15% to about $320~$340 psf ppr.

(2) Fall in volume of transactions

(a) HDB re-sales volume dropped by about 25% with COV moderating by at least 15%~20% (from $35K to $28K), and possibly towards the median of $10K~$15K by year end.

(b) Mass market condo re-sales volume dropped by about 10% ~ 20%. This is a flash estimate from part September data and the fourth quarter would be a better gauge of the actual impact of the cooling measures. Without the control measures, it was estimated that possibly the whole year growth would close at maybe 16 or even 18 percent higher. But now with the control measures, the market is likely to rein in growth to a more sustainable level of 2 to 3 percent on-quarter growth, with full year growth coming in at about 15 to 16 percent. On the overall, analysts expect prices to continue to moderate through the first quarter of 2011, with more supply entering the market.

(c) BTO Launch. A WOODLANDS build-to-order (BTO) project has attracted fewer than 3,000 applications for 1,329 flats, or about two buyers per unit - the lowest demand for a BTO launch in recent years. The numbers are similar to those for the last BTO project, Yishun Riverwalk, which concluded last month. It averaged about three applications per unit, well below the ratio seen in past BTO launches.

For example, in May, projects Punggol Emerald and Punggol Waves saw application numbers reach up to six times the 1,429 units on offer. Analysts said the lower number of applications for both the Woodlands and Yishun developments may be an indication that first-timers are returning to the resale market. My own opinion is that it might be those buyers who could really afford are also waiting in anticipation of the consolidation in prices of DBSS and EC units. I think that would be wise, considering that greater supply will enter the mass market condo segment in Q1 next year.

My only reservation is a certain degree of imperfection with the property market in Singapore, since land supply is manipulated by Govt. policies and it is the developers who are bidding for the land and fixing the property prices and the buyers of properties actually paying for the final product of  the real estate "development and construction" business. However, buyers should be aware that buying properties is different from buying stocks. Determining "when to sell" is a more important decision in investment on stocks to determine profitability and yield, but this is not equally true for property investment.  I personally consider "when to buy" to be the more important decision in "property" investments. Hence, the greatest trap in property investment is still a "personal" one, that of blindly following market euphoria to  purchase. Unlike stocks, there is seldom market euphoria to sell.

(d) DBSS Launch

There are no new launches since the control measures were implemented. I am looking forward to see how the public would respond to a DBSS launch, since PM Lee had announced during the N-Day Rally that those with a monthly household income of between 8,000 and 10,000 dollars will be eligible to buy DBSS flats. Meanwhile, the Govt has announced another DBSS site for tender at Upper Serangoon Road.

It should be noted that land bids for both DBSS and EC plots have dropped drastically and are only marginally different. It will be interesting to see how developers will price DBSS units. My own opinion is that if BTO and EC were to be priced fairly, the DBSS scheme might become a "monster" as suggested by this blogger? It seems to be there in the price spectrum just to illustrate the difference in quality between a subsidised public apartment and a non-subsidised one? If EC are priced fairly, I personally doubt the "sustainability" of the DBSS scheme, in view of the available property crowds frolicking to EC lanuches.

A DBSS is not really for "investment" but for a better quality living environment the way it is conceived.

(e) EC Launch :
The Esparina Residences, located in Sengkang, has attracted 1,155 applications or more than double the 573 units available, according to its developer.  The units are priced at $730 to $750 psf on average. Although located close to Buangkok Park MRT, this asking price is high in my opinion.  Land bid was $315 psf of GFA. My opinion of a fair price is between $635 ~ $690 psf without looking into greater details. 344 or 60% of the units were sold on the first day. 75% of the applicants were young professional aged 25~40, and half of them falls within the sandwich class bracket earning $8,000 ~ $10,000.

The second EC launch after 5 years is The Canopy at Yishun Avenue 11.  240 out of 406 sold on the first day of the launch with 60% below 35yo. The units were sold at prices of around $650-$700 psf. You may recall that I mentioned briefly this EC land bid in connection with the Milton Close bid, in my posting on 15 Sep 2010, "The Property Bubble and Investment Trap Part VII - Land Bid Analysis for Yishun 99 Yr LH Condo Site", that the land bid price was $281.31 psf GFA. The launch price is within what I expected of a private mass market 99 LH condo but is expensive for an EC and about 1.58km from the Yishun MRT Station. An analyst had predicted earlier that the winning land bid will translate into a break-even price of around $520 psf with the final selling price of the EC units likely to be around $600-$650 psf. My own opinion for the fair price is about $570~$600 psf without looking into greater details. It seems like buyers are paying for a future price with MOP.

From both asking prices, we can see that Developers are still asking for a high price considering current demand as they will not price in anticipation of the worst for the economy, and it is for the buyer to take risks and decide. Considering that construction costs may not be too transparent, the degree of market imperfection will allow the developers to enjoy this "premium" in pricing until such time more control measures are implemented or when the economy get worse. Anyway, it is always a willing market with buyers walking-in with eyes "wide-open". The issue is about timing and whether to commit now at still a high price or to wait for further price correction. The larger developers generally have substantial holding power for "land parcels" while there are sufficient willing buyers for these EC units.

Having seen the fast take-up rate at these 2 EC launches, is it then the right time for "market-watchers" who are keen buyers to act now? Personally, I consider "time to enter the market" as the more important decision, especially if it is not meant for "owner-occupation" but investment.

But even as an "owner-occupier", it is equally important to make a good decision considering that it is a big sum of money now to buy an EC. With prices expected to be stagnant and moving sidewards, with full impact only to be felt after the 4th Q 2010  and even continues through the 1st Q of 2011, it is worthwhile to "wait and see". But external drivers have to be watched.

Affordability in Perspective

In a side posting on 8 Oct, I had provided a link to Blogger Lucky Tan's posting on "Different countries same mistake" and the related issue on "affordability". To me, timing to purchase a new expensive property in a "bull" market is the same as if we are investing in an IPO in a "bull" market, and is not advisable. It is appropriate that I provide a link here to Mr Tan Kin Lian's posting (ex-NTUC INCOME CEO) on his advice to a "green" investor for a REIT IPO. You should read his advice which I feel is applicable to new investors of expensive properties. These are experts with rich Financial Quotient (FQ) and a sound understanding of the market.

It is noted that 60% of the EC buyers are young professionals. Many young purchasers are easy in their spending habits. Developers commonly use "sales" techniques such as employing good ID to do up their show units. Do be warned that the unit purchase will be bare without the furniture and furnishing!

Strategising for Appreciation in Property Value

I like to pitch these 2 different approaches to illutstrate on the issue of combining affordability and strategy :-

(a) Buying an EC immediately and with a high mortgage now on a high price psf for over 15~25 years (it should be noted that purchasers of new ECs are actually helping the Developer to finance his development while they enjoy their profits and you bear the interest), the wait is still 2~3 years to TOP.


(b) Buying a BTO or DBSS re-sale flat (or even renting) within a year with a lesser mortgage for 5~15years when price has consolidated and selling later on at higher price at an appropriate time and then upgrade to condominium  later on when the whole market is at its trough, say even by choosing a re-sale condo with good future potential for en-bloc or close to the anticipated East Coast DTL MRT line.

The latter is best illustrated by the HDB resale market when it was once more worthwhile to purchase 3Rm and 4Rm HDB resale flats, rather than 5Rm ones; to enjoy better return and yield. Ironically, the timing was when there was an influx of immigrants from China then who found 3Rm and 4Rm more affordable, and just when FH condominiums was about to fall in price by as much as 30% due to the financial crisis. But some 3Rm and 4Rmers had sold off too fast to upgrade to DBSS or even an expensive condominium which went through a severe 30% consolidation in price as the crisis went full blown. In fact, the ideal timing would be to enter the market at its "trough" and not during its "bull run" which is what these experts with rich FQ are advising, especially if it is meant to be a long-term investment. The decision must also be balanced with the posibility of being trapped in the long-run with rising interest while income (or employment) may be uncertain.

What could be mistaken?

(a) Most buyers are taking the mass market condominiums, particularly ECs as equivalent to the FH ones previously; and paying at the higher benchmarked prices. During the "trough" of the last downturn, even FH market condo prices consolidated by 30% or more. The future behaviour of mass condo market prices and valuation is a big question mark in a depressed economy. Its impact in a crisis is yet to be fully tested at such high prices.

From Q1 2007 to Q1 2010, the prices for EC shot up by 70% at the prime locations, compared with the 39.6% rise for mass market condo. But you should note the same degree of drastic fall in the 2009 Trough. The surge by 70% for the "performers" is due to locational factors and the imminent expiry of the early batch of condo from the 10 limitation period for re-sale to foreigners. You should also note the "laggards". Talking about fall in price, you should note that the HDB re-sale index was just a minor kink during the 2009 Trough. But the degree of consolidation of private mass market 99 Yr LH was about 30~35% and now it appreciate back by 39.6% and there is a stay in value. But the great difference now is that the EC buyers are paying for a very "high" price as compared with the first lot of ECs first introduced, and now "graduating" to become full private properties after clearing the 10-year bar from foreign ownership.

I hope readers can see my point here - to climb from a high point to the next high point is not easy as compared to climbing from the "trough" to its previous high. It took the private FH or 999 Yr LH condo sub-market more than 10 years to climb from one peak to the next peak, with most being supported by appreciation due to the MRT DTL 2 in order to re-coup back the cost of investment or interest incurred.

(b) Analysts argue that as long as there is a price differential between EC and mass market condo, there will be demand for ECs. There is a differential of about 14% below the 99 Yr LH mass market condo. (This differential was 29.7% in early 2007). But considering that units such as those at Esparina are priced at $730~$750 psf, I doubt about actual affordability and whether this differential will remain in future. And will there be another differential with mass market 99 Yr LH ones by another $100 psf if supported by favourable factors like proximity to MRT stations, such as in the case of LV Residences?

What external drivers to watch?

If you look at the "peaks" and "troughs" of the property cycle, they are all linked to the performance of our own economy in relation to the world economy. The immediate economic risk and concern is whether the world will face a currency war. Efforts by the United States and Japan to weaken their currencies would lead to higher global commodity prices and fuel money flows into emerging markets, pushing up inflation as well as stock and property prices. When this manifests, will there be more control measures? And for those who bought, especially if it is a new property; can they simply sell off to reap a good profit considering current prices is already higher than the 2006 peak - there must be another risk-taker. If you re-visit any of the property cycle graph or index again, you will see what commonly follow a peak is always a drastic fall. It is hard to imagine that the PPPI or the HRPI will plateau after a peak. It had never happen before since 1975.  In my opinion, it is impossible for the property index to repeat a climb similar to the the stretch from Q2 1986 ~ Q2 1996 at today prices and therefore a drastic fall is more probable after a climb to a peak.

My final point is : Do you purchase an expensive property blindly by looking at "affordability" alone?


  1. If home buyers are only willing to consider resale condos, they are actually quite affordable albeit slightly older...

    The condo (99-year leasehold about 10 years old) that I live in is less than 800m from the MRT and it's only going for less than S$650psf!

    Seems like Singaporeans just have a fascination for things new and shiny be it new cars, new apartments...

  2. Hi xtrocious

    I do agree, which is why I consider current prices for new launches are still too high. I would think a fair price is about $680~$720 psf for 99 LH new ones.

    The Govt is pushing out EC, but look at what prices private developers are selling them. Forget about DBSS ...

    While HK and China are taking new measures, it is quite ridiculous to see the current pricing in Singapore, as our Govt "wait-and-see".

    I would think the additional money spent can go into engaging a good ID and re-doing the interior decor to one's taste and preference for old condo.

    Anyway, a LH property tend to be marginalised vs a 999 Yr or FH one from the investment perspective. It seems that the Govt is allowing the RC market to be "speculated" soon particularly those crossing the 10 year limitation period...look at the HRPI and you will see why our HDB flats (new and old) keep on going up from 2006 ~ 2010. While PPPI took a deep, not the HRPI.

  3. (quote)
    My final point is : Do you purchase an expensive property blindly by looking at "affordability" alone?

    Actually I noticed something which is quite telling.

    Foreigners tend to define affordability using the median multiple of income, which by definition takes into account the absolute value of the asset (i.e. how long you have to pay it off for).

    However a certain Singaporean minister chooses to define affordability using the claim of, if you can afford the monthly instalment, properties are affordable!

    A similar parallel can be found amongst those property buyers whose thinking goes along the lines of, "interest rates very low, property is affordable lah!"

    Not a squeak about the total debt burden being placed on the person's shoulders... perhaps because he is not intending to service the whole lifespan of the debt?

    This mindset is very telling, don't you think?

  4. keep it coming...except for Colin Tan from suntec chesterton, every quoted utterance on ST is always bias on the upside

  5. Hello,

    Thank you for your insights and analysis guided by your experience in the property industry. It has been a relief to see the figures you've posted affirm the unsupported intuition I'm feeling.

    I've subscribed to your blog via my google reader and look forward to more posts from you.