Residential properties: Waiting for Godot?

 

July 1, 2011 ⋅

Home buyers – especially those buying for owner-occupation rather than investment – have frequently commented: “I want to wait for the next downturn before I purchase my home.”

 

They have been saying this for the past 12 to 18 months. Till today, they remain adamant about the impending downturn of the property sector. If they are lucky – lucky of the Big Sweep kind – a sharp downturn might come soon. Perhaps a perfect storm of external crises added on to an immense oversupply of completed units?

 

Imagine: Greece decides to default on its debt, European lenders stumble because they bought the bulk of the Greek debt and this in turn cripples US financial institutions because they insured European banks against Greece’s default. Consequently, Spain, Portugal and Italy are rushed into a financial ICU, global credit re-freezes, affecting even the conservative Asian banks. Global confidence sinks, employment shrinks in Singapore and property prices here fall because the fringe investors feel the jitters.

 

If such a scenario really occurs, the lucky potential home buyers who remain cash-rich may get a chance to buy on the cheap, say, perhaps 20 per cent below today’s prices – taking us back to levels of about 12 months ago, not 18 months ago.

 

But, has it been worth the wait? Let us begin with the basic facts. The Urban Redevelopment Authority’s (URA) Private Residential Property Price Index has climbed about 50 per cent in the last 18 months. On a year-on-year basis, the private residential index has shown growth every quarter for the last six quarters.

 

Over the period of October 2009 till March this year, the Straits Times Index (STI) rose steadily as the economy expanded strongly. The booming economy created new jobs, increased wages and generated new wealth. Inflation rose faster than the strengthening Singapore dollar could help, hitting a three-year high of 5 per cent per annum due to global commodity shortages, food supply disruptions and roaring Certificate of Entitlement prices. The one key component in the whole equation that slithered downwards was interest rates.

 

Savings rates have been below 0.5 per cent per annum for the past two years. For the home buyers who have waited for the market dip since end-2009, not only have their Singapore dollars diminished in value due to inflation, they might have missed out on the 17-per-cent rise in the STI or the 50-per-cent rise in the private residential sector. Those who invested their cash in the Singapore stock market will still be down against those who invested in the private residential sector.

 

But here we are talking in general about price growth. We have not included the returns from stock dividends or return on equity for properties financed with loans.

 

Particularly for the home buyers who stayed on the sidelines in the last 18 months and who are still not committing, we have also not included the “return on enjoyment”. In fact, I would say that staying uninvested and missing out on the returns of enjoying one’s own home is probably the biggest loss – loss of satisfaction.

 

For those who think that they might have missed the residential property boat, there is no need to fret. The 50-per-cent rise of the URA’s Private Residential Price Index was driven by: 1) properties in the outskirts and 2) record prices and volumes achieved at new launches. There are many older apartments of good value in Districts 9 and 10 which have scarcely risen in price.

 

In the examples highlighted, Valley Park has seen a 15-per-cent increase in average $psf prices in the last 18 to 20 months. That is well below the overall rise of 50 per cent for all residential properties across the island over the same period. And at a unit price of between S$1,200 to S$1,400 psf, it is my view that these properties above represent exceptional value versus properties in the Outside Central Region (OCR) that transacted at this price range recently.

 

There are many more examples of well-built developments in districts 9, 10 and 11 whose prices have increased by less than 20 per cent and are trading well below their newer neighbours: Aspen Heights, Waterfall Gardens, Nassim Jade, Tanglin Park and Sommerville Grandeur, just to name a few. I believe that there exist many good-value homes for those who search hard. As these properties are considered undervalued relative to their neighbours, the downside to the price levels will be limited even if a Greek debt crisis occurs.

 

By Ku Swee Yong – founder of real estate agency International Property Advisor. He is the author of Real estate riches: Understanding Singapore’s property market in a volatile economy.