Tan Kin Lian's Blog: Bust of property bubble

Friday, August 13, 2010

Bust of property bubble

This article explains the consequence of a busting of the property bubble.

My view
Property prices are too high in Singapore and can suffer the same consequences in the future. Do not assume that land is scarce and property prices will continue to escalate. The sharp increase in recent years is due to temporary factors, such as immigration and low interest rate. The danger is that property prices (and rental rates) are out of line with income levels, and cannot be sustained.

A warning sign - there is a report that no bids were received for an executive condominium project in Jurong. It suggest that the media report about increasing property prices may be exaggerated.

Read my views about "Invest in Property" in www.tankinlian.com/ask.aspx.

12 comments:

singapore man said...: Hi Mr Tan, You forgot to mention that since HDB flat is on 99 years lease so the price cannot go up indefinately, once people start to realise am i paying too much for a $400,000 4rm flat with only 60 odd years of lease, then our bubble will start to burst. I predict the bubble will burst in the next 10 years when a main bulk of HDB flats reaches 40 years of age and the first HDB are nearly 50 year.; August 13, 2010 9:04 AM
Unknown said...: Mr Tan, I couldn't concur with you more. You're so spot on. I'm no expert myself but my fingers had been burnt before, so I know exactly what you're saying. Things are not always as rosy as what's reported in the media. It's their way of keeping the market confidence buoyant (and giving people a false hope).

Thanks for the level-headed and down-to-earth advice. I know for sure it will get a lot of people out of harm's way.; August 13, 2010 9:09 AM
C H Yak said...: I have worked in the construction industry for more than 20 yrs and had done a few private condo projects. I agree with Mr Tan that property prices are too high and not sustainable. It is more of an investment trap now.

It is reported in TODAY that the GOVT is pushing out more EC sites. 4 site to be launched in next 3 to 6 mths; about 2600 units. The last EC launch was in 2005 and completed 2008.

Based on current land prices, the EC will be priced at $650 to 750 psf. The median price for private suburban condo is about $824 psf (abt 10~25% higher). Slightly upmarket location are selling at $850~950 psf, esp freehold ones.

How high is it compared to the high of 1996 "peak" prices ?

In 2006, the price of mid range private suburban condo is about $700~750 psf (freehold). Hike of at least 15~18%. EC was about $480 psf then. Lower range private suburban condo was going for $580~650 psf, often due to a shorter lease say 99 or 999.

Imagine EC is now about 35% more expensive. This is ridiculuosly high.

The real secret about the construction costs is that other than "steel" & "aluminium", other costs are relatively stable. Condo use less "aluminium" than "commercial" or "institutional" buildings. So the critical factor is "steel" price.

But with the global slowdown, steel price has consolidated just like stocks. Euro is cheap and you get marble also cheaply. Bangla workers and Indian workers ... still cheap ... they are not building condo back home. Chinese workers slightly more expensive than before.

The problem with prices then lies with the private developers & GOVT as landowners. Both are aiming for an appreciation in price benchmark of about $200 psf in their launches.

Simply, you are getting a "lesser value" property than the peak in 1996 prices in terms of number of years of leases. It is one grade down...meaning at 2006 freehold price .. you now get 99 or 999 lease. If 999 lease still not that bad. You now get EC at 2006 99 or 999 prices. You also get HDB DBSS at 2006 EC or 99 private condo prices.

DBSS HDB flats goes as high as 650~700 psf. In 1996, you get suburban free condo at that price Ridiculous, Right? !!! Due to HDB tendering out land sites to China D&B contractors & developers ??? Local firms also join in with high bids for lands ... TRAP for Investment, I call it.

MBT thinks this is healty. He needs these statistics to prove his HDB BTO flats are still "affordable". If not, he needs to give more real subsidy. LOL.; August 13, 2010 9:55 AM
Unknown said...: May I have details on the executive condominium project in Jurong?; August 13, 2010 10:01 AM
Singapore Plebian said...: Again this issued is raised. I think it is not raised often enough. Every suburban mass market project with prices in excess of 1000psf is being sold out. These buyers are likely to be "upgraders" chasing the elusive dream of "living in a condo will improve my quality of life". Ask anyone who has over-extended themselves how is their quality of life.

I think we need to take a step back. We only earn x dollars per year. How much of it should go towards housing?

When the CPF scheme was initiated way back when policeman wore shorts, the total contribution was in excess of 40%. The basis of the scheme back then was correct, to provide a nest egg for retirement.

When the CPF floodgates were opened to allow this nest egg to buy property, things changed. Here is "free" money to buy a bigger, better home that will surely increase in value, so i can cash out and downgrade to retire.

Big assumptions. Firstly, we assume that prices will always increase. Fact is, real estate prices move in a cycle.

Secondly, we assume that when we want to downgrade, we can time the market so we can cash out. When prices are high and you want to sell, buyers are scarce. When prices are low and you think you should downgrade, you will hesitate because last year you property was worth more. Moreover, when you sell high, you need to buy your replacement high unless you are prepared to rent.

Thirdly, we assume that we can continously service an extraordinary level of debt repayments. What happens if one loses one's job? Or gets sick? Or interest rates rise?

I think we should encourage all those around us to exercise extreme caution in these times. Prices are clearly high. A purchase now would entail extreme levels of debt versus annual incomes. Everyone should take a step back, pause, do their total sums from now till retirement and then make a decision as to whether or not one can really afford it.

I always believe that from a financial planning perspective, the housing basket and the retirement basket should be kept separate. We should not treat our primary residence as a source of retirement income. This could result in never being able to retire, or a depletion of of funds extracted from your housing equity.

So please exercise some caution, think twice, and if you really want to buy at these levels, be prepared for the worst case scenario of negative equity.

As a parting shot, I always ask my friends, "which will bother you more: not having 200k capital gains because you bought too late or losing 200k because you bought too high?"

The answers to the above so far have been unanimous.; August 13, 2010 10:28 AM
JRT said...: What goes up must come down and vice versa. This is the natural law

The question is how much it will come down and when it will come down

Relatively speaking, it is safer to buy stocks, foreign currency or gold. Even if you are burnt, you can still recover quite quickly. In stocks, foreign currency and gold, the market is very liquid and you can close your position quickly. Moreover, there is this wonderful function call "Stop Loss", which is the maximum amount you are prepared to lose in a transaction

But if you lose in a property transaction, you may end up a lifetime paying off the losses or debts. When you want to sell, you may not find buyer or at the right price

It seems clear to me that Singapore property market is too hot but our government continue to live in self denial mode and refuse to intervene sufficiently to cool the market. This is setting the stage for a harder fall for the home-buyers. I hope that people will exercise caution when buying property. While it is true that what is high will go higher, the stake is too much in property transaction. As mentioned, if you enter at the wrong time at the wrong price, it will take a very long time to clear the debt before you have the next lease of life to invest again. Worse, the typical Singaporean wages are not rising and many risk retrenchment or paycut; August 13, 2010 11:58 AM
C H Yak said...: The next "investment trap" I like to share is the length of lease.

Developers have come out with 103 years leasehold titles for condos. This sort of take into account the few years of development time, so when you actually buy and takeover, it is close to 99 years leasehold.

The developers are very smart. They control this "land bank" for their "family assets". If freehold titled, an old condo has high "en-bloc" value. So developers carved out shorter leases and supposing sell at lower affordable prices ... but actually buying such properties means losing future "en-bloc" value although you are buying at prices equivalent to 1996 high prices of freehold condo.

Hence, in Katong area, 103 leasehold condo are priced at over $1,200 psf. You buy at a now higher benchmarked price of additional $200 psf but lose the future "en-bloc" value. After the 103 yrs, land and property titles revert back to the "developers" and their "family" enjoys the future values.

Another price trap (also investment trap) is "bay window area" ... counted as saleable area ... but actually does not constitute as actual GFA of your property ... suddenly you find at time of handing over of new condo apartment, how come all the bedrooms and even living area become so small. Even smaller than that of your old HDB flats actual GFA which has no bay windows. But you pay each sf of the bay window at say $1,200 psf as per above example.

You can't even put a Queen-sized bed into the bedroom and a study table.

Say you have 2 bedrooms with bay windows and the living room with bay window, you will lose about 12~20 sq metres or about 125 ~ 210 sf. i.e. almost one bedroom in total or about $250,000 based on 1,200 psf saleable area.

Hence, you find you lose 1 bedroom in space but pay the developer as if it is one bedroom equivalent to your old HDB flat.

So for EC ... it is easily 35% + 10% more expensive if you fall into bay window trap.

Your property agent is not going to tell you this if it is a sub-sale and 1st buyer is a speculator. He gets his fixed percentage of sale price.; August 13, 2010 1:12 PM
Ronnie Yeo said...: Hi,
I used to work near the place near the plot of land which no developer willing to bid for it. Distance away from the Lakeside MRT station, traffic is heavy, not much of amenities and most of all, it is just EC. The private condo beside the Lakeside MRT are selling like hot cakes, why should any developer bid for this piece of land only for EC? My 2 cents' views!; August 13, 2010 2:47 PM
Kenny said...: Hi Mr Tan
True that the average Singaporean cannot afford the current property prices.

But note that Singapore is allowing rich foreigners to buy property. These private property prices are not out of line with their income levels. Notice the amount of private property launches recently? These buyers are pushing up the prices further.

China is now cooling its property market aggressively. A recent news report suggest that these buyers are now targeting Singapore market, further inflating the bubble.; August 13, 2010 7:04 PM
michael13 said...: These 'rich foreigners'/'FT' come and go. When they are asked a question: "Will you stay and retire as a Singapore Citizen here?" A big majority of them will shock you with their wry answers: "What for!" Do you think that our government policy of welcoming them with a big heart will 'one day' pose a huge potential risk to us/the locals when they decide to bid us 'good bye' and 'good luck'. What kind of safeguards we have? Do we make a good calculation? Will our elected government be willing to bail us out from the collapse of property market? Or just issue a standard statement: "You take full responsibility for your own decision." or "It's a market force at work". In fact, Singapore had experienced once such a property slum which was to some extent resulted from one of these factors of rich foreigners' buying spree in the late 1990 and the early 2000. History always repeat itself. Do men really learn? Care to share?; August 13, 2010 9:42 PM
JRT said...: I thank Mr C H Yak for sharing his experience. It is very informative. So proud owners of 99-year condo slog their entire life away and pay off the loan of their condo which they do not actually own possibly in their natural life. These proud owners are in fact, slogging their entire life away just to pay off the lease (aka rent?). No wonder developers and bankers are ranked the most wealthy in Spore; August 13, 2010 11:53 PM
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Friday, August 13, 2010

Bust of property bubble

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