Let’s take a closer look at the numbers

   July 8, 2011 

Ku Swee Yong dives into the details of the OCR to get a clearer view of where property prices in Singapore are trending

As a follow up to “Massive home supply to hit outskirts” (Today, June 24), I’d like to take a closer look at the residential transactions in the Outside Central Region (OCR). In the June 24 commentary, I was concerned that “the proportion of units in the outskirts and mid-tier locations of Singapore will rise from 67 per cent to 74 per cent. Now, the percentage rise may seem mild but in absolute numbers, we can expect 8,686 units to be completed within the Outside Central Region and Rest of Central Region (RCR) in 2013, 13,014 units in 2014 and 14,510 units in 2015″.

When taken together with the potential increase in supply of HDB flats in the new towns, there is a worry that demand may not keep pace with supply. Most of the properties that were launched for sale this year – assuming construction also begins this year – will contribute to completions in 2014 and 2015.

What’s more, even tiny one-bedroom and studio units in the OCR have recently set and surpassed price records, on a per square foot basis.

Since the bottom of the market in the second quarter of 2009, the price index for OCR has risen slightly faster than the index for the Core Central Region (CCR). But these residential indices are merely derived numbers, with many assumptions behind them. While useful for tracking broad market directions and the relative magnitudes of rises and falls, indices provide no indications of the number of transactions nor the price per square foot of the average transaction.

To understand the price movements in the OCR segment, let’s dive into the details to get a clearer view of where prices are trending and where the risks might be, if any.

In the past six quarters from the last quarter of 2009 to the first quarter of this year, there were about 20,000 transactions in this region (see tables on the next page for a list of locations that fall within the OCR). We’re not looking at data from the second quarter as full data probably will be available only after August.

The total number of caveats of non-landed private residential properties filed in the first quarter of this year in the OCR was 3,076 and 1,030 (33.5 per cent) of these transactions were for properties priced above S$1,000psf. These transactions included developers’ sales, sub-sales and resales.

Within those 3,076 transactions, 52 per cent involved properties that have yet to be completed. Given the increased Seller Stamp Duties, developers’ sales, rather than sub-sales, accounted for the bulk of these transactions.

As you can see from the charts above, the total number of transactions priced at more than S$1,000psf grew strongly from 183 in the last quarter of 2009 to more than 1,000 transactions in the two most recent quarters.

In terms of proportion, the number of transactions priced at more than S$1,000psf rose from 7.1 per cent to 33.5 per cent.

What’s more, the share of uncompleted properties transacted increased from 33 per cent to 52 per cent, reflecting the strength of new sales in the outskirts of Singapore in the last 18 months.

Even at a higher price point …

Now, let’s slice the data at a higher price point of, say, S$1,300psf. At this price level, an investor might well have considered older properties in Districts 9 and 10, but yet we see a clear increase in the number and proportion of transactions. Perhaps older properties in District 9 and 10 have a larger strata area, so investors would have to fork out a larger investment amount. This may be why investors prefer to pay a higher per square foot price level (but lower total investment amount) in the OCR.

Or it could it be because the investors simply did not do enough legwork in scouting for good-value gems in the central districts?

S$1,000psf – the new normal?

Some years ago, analysts forecast that mass market residential properties will rise to an average of S$1,000psf, thanks to rising household incomes and rising HDB prices. An upgrader who has accumulated a lot of equity in his 10-year-old HDB flat would be able to afford a private condominium if he sold the HDB flat, added some cash or CPF funds, and took on a new mortgage.

According to the data, it seems the mass market will be reaching that point soon.

While the size of the average unit shrunk from 1,265 sq ft to 1,131 sq ft in the OCR, the average value of each transaction increased from S$916,153 in the fourth quarter of 2009 to S$989,880 in the first quarter of this year.

As a result, the average price per square foot jumped from S$724 to S$875, a 20-per-cent leap over six quarters. And in each quarter, we see that peak transacted prices in the supposedly “mass-market” segment to have exceeded S$1,400psf.

Given that 33 per cent of transactions within the OCR in the first quarter of this year exceeded S$1,000psf and that the average price transacted was S$875psf, it seems that we are not too far off from reaching the new normal.

For those who have already purchased in the OCR at prices near S$1,000psf, perhaps there is still some room for capital gains as the average rises from S$875psf to S$1,000psf (another 20-per-cent rise).

For some who have purchased at the S$1,300psf mark and above, the price upside may be limited in the medium term while the mass market grapples with the strong supply in the outskirts from 2013 to 2015.

For the rest who have yet to invest but who are seeing the new normal in the mass market rise to S$1,000psf, perhaps we should ponder about whether the new normal in Districts 9 and 10 deserves to be S$2,000psf or S$2,500psf and the new normal for the prime district of Orchard Road to be even higher at S$5,000psf, S$6,000psf or S$7,000psf?

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.