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Smaller apartments' prices more resilient.

Tuesday, October 1, 2013

Predictions such as the recent one by Barclays for a significant correction in housing prices in Singapore by 2015 are getting rather common.

"We believe the risk of a residential property market correction in the next two years is rising, as expected higher interest rates look set to coincide with a large increase in housing supply over 2014-15," Tricia Song, analyst at Barclays wrote in a report on Friday, 27 Sep 13.

In such a situation, can we expect certain segments of the housing market to weather the decline better than others?

In The Business Times today, I read that "prices of small completed private apartments (up to 506 sq ft) climbed for the second month in a row to hit a new peak in August."



SkyVue

CapitaLand's latest project "SkyVue" in Bishan saw 410 of the 505 units released for sale snapped up on the first day with smaller formats being the most popular. One bedroom units at 484 sq ft in size averaged $750,000 in price (or $1,550 psf).

It is all a matter of affordability now. How many buyers questioned if it is value for money? How many have questioned the risks involved?

Almost 95,000 private units are expected to come on stream over the next five years, alongside 25,000-27,000 public housing flats per annum, according to the Urban Redevelopment Authority.

"Total housing supply could average 40,000 units per annum and peak at 47,000 in 2015 - significantly above the historical average annual supply of 12,300 units," Song said.

"Assuming occupier demand of 15,500 units of private housing per annum, we expect the private vacancy rate to rise from 5.6 percent currently to 9.9 percent in 2016," she added, noting that historically when vacancy rates hit 8 percent, rents and prices start declining.
(Source: CNBC)

Bearing this in mind, in a situation where overall housing prices experience significant declines, smaller size apartments' prices could remain more resilient. This is because of their relatively smaller price tags and, usually, higher rental yields.

For people who are adamant about buying a condo as an investment property, shoebox apartments or mickey mouse apartments would, therefore, seem like safer choices. Right or wrong? Time will tell.

Related posts:
1. How big is a 452 sq ft apartment?
2. Will CapitaLand build "almost inhuman" size apartments?

20 comments:

veronika said...

Property prices in SIN has never stayed down since independence.

It may decline and stay down for at best 2 years. After that is starts to climb back up and often very,very quickly.

Location is key... yet, any piece of land here is worth buying. The provision is that one must be able to hold out beyond 15 years. Unless you want to be a trader ( flipper )... which is difficult given new rules.

Strata titles are just as good.. sad stories only if you cannot service loans.. happy stories when you pay full... in cash.
That is when location is important.. to get the highest rental yields, based on the lowest capital outlay.

Property tax
Income tax
Conservancy fees
Agent fees
Furniture & fittings
Aircon
Maintenance/replacements costs

all eat away yields... count carefully before buying. From 4% it can become 1.5% easily.. and its not static either:

with a stroke of a pen from parliament and you can be wiped out!

AK71 said...

Hi Veronika,

Thanks for sharing your thoughts. All valuable inputs! :)

Buying when there is a pull back in price seems like the way to go when it comes to property investment in Singapore since land is scarce here and, like you said, "any piece of land here is worth buying" as long as we have holding power.

People who do not have holding power, who have leveraged to the max, are the ones who will suffer the most in a downturn. These are usually the ones investing for "positive cash flow" using other people's money.

I usually look for properties which could provide a gross rental yield of at least 5% to 6% which is close to impossible to find in Singapore today.

sillyinvestor said...

I have many colleagues talking about property investment as a no brainer investment. They think that property prices defy the law of gravity.

My sister-in-law is also looking for a property just recently, she made quite a tidy selling its HDB and buying a condo, and then selling the condo for a HDB again. Recently, she is looking for a private apartment, purely for investment and rent. Below is a SMS i sent to her, after losing some sleep pondering whether or not to do it:

Hi XX, have been wondering whether to tell u this. Just take this message for info for considerations. I find buying a property a highly risky proposition now.
1) very high probability of interest risk in the foreseeable future. The historical av. Is 4 percentage and the highest during the Asian financial crisis is 9%. We should take 3 % as a prudent long term calculation.
2) When it is 3% , u might have negative yield on your rental. Depending how much u can rent your hdb or at all.
3) The next risk although highly unlikely, should be taken into consideration too. That is the LTV of your property might fall, and the bank can demand top up before they continue the loan, that's what happen during the Asian financial crisis.
4)There are other things to consider too, like under hdb rules, u are free to own properties as long as you stay in the hdb, but of u choose to stay private and rent hdb, there is enforcement risk by hdb.
5) Lastly, price is highest at psf level historically, if u are thinking of flapping property for the short term, think cooling measures and already rocket high prices. If u are going in for the long hual, the chances of success is very high but do take what I just mention above in your calculations. Sorry to bother u with my long message, this thing on my mind for a few days, think better get it off my chest .. Hope if u go ahead with purchase, it will be smooth sailing an huat ah!!!

AK71 said...

Hi Mike,

You are always prudent in your considerations. Thanks for sharing! :)

Indeed, if we take care of the downside, the upside will take care of itself.

The spectre of increasing interest rate (normalising at 3% to 4%) is why I would only invest in properties which are likely to give a gross yield of at least 5% to 6% now (which might translate to a net yield of 4+%). If we cannot make money, at least we must not lose money.

It is definitely much harder to find a value for money deal in Singapore now.

salaried guy said...

Hi all,

Thanks for all the inputs. They are very valuable.

But just a nagging thought in my mind: there have been 'word of advice' and 'play it safe' caution since the days of 2008. In fact, during GFC, analysis have been saying that this property boom can't last. And these advice and knowledge have been going around for years...

I mean, 2008 to now is about hmmmm 5 years? And analysts are saying the prices will correct in year 2015? So... 7 years?

I remember a book I read in year 2008, from the author Harry Dent. He always predict doomsday and stocks will go down, stay down, etc. Even when the market is riding up, he continues to say this is just short term and the market will go down. And guess what... one day he will be right!

I hope I am not ruffling any feathers but just wanting to share the thought that while many people have been sharing and claiming property is 'going down', which it hasn't yet, could it due to just simply a way of 'hoping it goes down'? I mean - if I didn't buy that property because I thought prices were going down, I believe it will definately go down anyhow.

Maybe some sour grapes?

Why am I saying these? Well, simply because I AM the sour grapes farmer. HAIZZZ!! I have been hoping the property prices to drop for yeeears, and yeeears, but it seems it is still not going down. And to top it off, the friends whom I have been cautioning 'prices are going down', are earning money and having capital gains. In fact, one of them just sold off his condo and made $200,000 cash in profit. He had turned to me and said, "Where's the correction you have been talking about? Bro, you missed the boat then say missed the boat lah...have a renewed mind, bro!"

I was like, shaken, but woke up! I thought to myself, "Hey, maybe I should look at the facts and re-learn again."

Truth to be told, I am still agreeing to the 'fact' that prices are going down. After all, one day, they will be anyway.

But during the upturn years, well, I missed the boat but being overly-conservative.

Just sharing my personal experience.
I

AK71 said...

Hi I,

I hear you and I feel for you.

If you are a regular reader of my blog and if you have been with my blog since its early days, you will remember that one of the things I always say is to be pragmatic. Don't be too optimistic or pessimistic. Be pragmatic.

There are people who are 100% in cash since the GFC and there are those who are 100% invested in as many years. For now, the latter group is laughing. When will the party end?

This might not be any consolation to you but it is good to be partially invested while keeping a war chest ready, always. If our pockets are deep enough, the same goes for investing in properties.

If I did not sell my 2 bedder 2 years ago, I could possibly get another $200k if I were to sell today. However, was there any guarantee that this would have happened? With a bit more patience, maybe?

However, I also bought a 1 bedder as a hedge early last year when I chanced upon a deal which I thought was value for money. When I see value for money deals, I buy.

This 1 bedder is worth $100k more today. This does not quite make up for the $200k I could have made by holding on to the 2 bedder but because I was not overly pessimistic and because I did not shun the property market totally, I reduced my "loss".

Also, we have to remember that property is not the only place we can make money from. Using the funds from the sale of the 2 bedder, I was able to benefit from some good investments in the last couple of years.

It is also pragmatic to move on and not cultivate any sour grapes. People make their money their way and I will make mine my way. Always tell yourself this. :)

sillyinvestor said...

Hi Ak and salaried guy,

I felt a need to explain myself. My advice is specifically for my sister-in-law in mind as I know her financial situation and profile quite well. She does not have a buffer should something go wrong.

Also, I would like to explain what is different in 2008 and now.

Everybody expect the poor economic numbers will lead to a poor housing numbers, but then, Ben stepped in with QE, that effectively become a guaranteed of low interest rate. Now Ben has mention about tapering, I am not sure if it will start next year or 2015, but the ballgame has changed. Of course, Yellen, could decide to continue with it, and the party will continue. If you believe in QE4, then, you should buy now.

Investment is about margin of safety, regardless of stock or property. The physical property price is having a party, but property tycoons in Singapore are all conservative of their prospect, many counters are traded at NAV or discount to NAV, almost all are trading at steep discount to RNAV, what does this tell you? Investors in general have been very conservative of the future.

Also CDL chairman, kwek Leng Beng, think it is suicidal to buy land in singapore at prevailing price.

http://www.todayonline.com/business/suicidal-buy-land-current-high-prices-cdl-chairman

So if he think price can still raise further, would he think land is overpriced, or suicidal in his own words?

If you look at URA data, 2015 will see 25000-30000 residential units coming to supply. This info is already available in 2012, but prices has been climbing from then till now, so this supply overhang is a non-issue? I would rather think there is irrational exburance in the physical property market, and when the ACTUAL supply come into market, ACTUAL impact will be felt.

Last, I have renting out my unit for the past 2 years, I got a tenant within 2 weeks for both times. It has been a month, but I have not rent out my unit. FYI, my HDB is just beside a mall and a stone throw away from the interchange. I talk to my agent, she said market has been quiet. I told her, dun worry, I need no rent to pay mortgage. IF you have a big buffer or you pay up the house at one shot, then you have no interest risk, and servicing risk.

If you track property counters, almost any tom and dick launches will be snapped up 1 year ago, or even few months back. The recent Sun Vue, and Tembusu are still doing very well, but the same cannot be said about the smaller developer lauches, it is taking longer to do a soldout. Of course, we could see the signs and numbers as just passing dip. Well, it might, but to me all the signals are already there.

I understand about missing the boat, and also the pain of missing the boat. But what do you do when you miss the boat? Wait for the tide to turn and the boat to return or rush into the next boat, hoping the tide will still bring you somewhere. Well, it might still have the wave to bring one somewhere, but it could left someone stranded too...

Warren Buffet and Peterlynch both warned about feeling of "money not earned" is money lost. No one is worse off with money not earned, but in the rush to recoup "money not earned", we could be losing real money.

I do not feel market will crash like 50% in the past cycle, but I thought 10-20% will be inevitable, but property market has various segment, some might buck the trend, but generally the risk has increased. Again, if you researched deeply, there is still money to be made in whatever time

AK71 said...

Hi Mike,

Thanks for the very detailed comment.

I didn't know you invest in properties too. Your unit is having trouble renting out now? Actually, I am not surprised. The rental market is rather soft now. Could get worse, I agree.

People who have bitten off more than they could chew would probably have to spit it out or risk choking. Only time will tell, of course.

sillyinvestor said...

Haha AK,

I where got so rich to invest in property. =P

Its my HDB flat, we move in to live with my mother-in-law a few years ago, for childcare arrangement. My wife likes the mum's company and pampering =P, so she doesn't want to move back.

I being the henpecked husband just go along with her. muhaha..

Well, there is some truth in 家和万事兴,with harmony in family, the rest will be prosperous

AK71 said...

Hi Mike,

Oh, can we rent out our HDB flats like this? I didn't know. I was under the impression that we can only do so if we are not in Singapore for an extended period of time.

I have a friend who moved with his wife to stay with his parents and sold his flat in the process. He should have rented out his flat instead of selling it.

sillyinvestor said...

AK,

You can do that legally, as long as you have occupied the flat for at least 5 years.

http://www.hdb.gov.sg/fi10/fi10323p.nsf/w/RentOpenMktRentOutWholeFlat?OpenDocument

If you wish to sublet it earlier, you might appeal on grounds of childcare arrangement, care for elderly, overseas deployment etc.

I declared everything and done all paper works, everything is aboveboard.

My friends laugh at me, since I pay higher property tax and income tax as a result. But I rather be honest than have HDB and Iras coming after me =)

AK71 said...

Hi Mike,

Honesty is the best policy especially when it comes to dealing with the government. ;)

I must congratulate you on this arrangement. Assuming you were to rent our your flat for $3,500 a month, that would be a gross $42,000 a year. Estimated net $38,000 a year. Assuming you bought your flat for $270k, the flat would be free after 7 years! :D

salaried guy said...

hi all,

very enlightening. I guess you are right, Mike.

Money not earned is not money lost.

I do have some war chest on ready on hand, and thinking about studying accounting, ACCA or CPA to learn about investement or getting undervalued stocks.

I'm not sure whether AK has studied accountancy before, but I am investment clueless...while holding an economics degree. lol.

I'm new to this blog though. Just stumbled on it at work and thought it's so interesting and enlightening.

AK71 said...

Hi I,

I don't have any professional qualification in accountancy. I did do two accounting modules in my diploma course, Managerial Accounting and Financial Accounting. However, they are just the tip of the iceberg.

If you are interested in reading financial statements from the standpoint of an investor, I recommend the book "Warren Buffett and the Interpretation of Financial Statements". You will find the link here:
Warrent Buffett and the Interpretation of Financial Statements.

An eye opener for me. :)

sillyinvestor said...

AK,

Unfortunately, the rent is only $2500 and $2600 respectively, also I give 35% to my mum-in-law, don't want to be call a free-loader in her unit, is like I "renting" a room at her place, but the care and concern come free! Great deal you bet!! It also come with a no rent no payment insurance rider!!!
This is separated from the additional money I gave as household allowance every month.

I have very high expenses, that why I envy your saving habits, although I know its not up to me(身不由己) at times hahaha

Hey Salaried guy,
Great job! so motivated! I am a lazy guy, although I did thought getting those so I can change line.. haha I recommend "the intelligent investor" by benjamin graham. BUy the book, it will take months to read.

AK71 said...

Hi Mike,

OK, then, you get a free flat after 13 years. Not bad either. ;)

I know what you mean about not being a free loader. I pay my sis $800 a month for staying in her flat's spare room too.

Some people wonder why I do this. I tell them that my sis could have rented out the room for extra money if not for me. Simple.

I don't think my expenses are low for a single. I estimate it to be about $50,000 a year, the biggest ticket items being the car, insurance premiums and "rent".

EY said...

Hi everyone,

I'm catching up on the interesting conversation here. :)

Thanks Mike, for sharing Warren Buffet's golden words 'money not earned is not money lost'. We need to keep chewing on this. We should also condition ourselves to think that money lost can be earned back. No venture, no gain (no loss also). When we venture, we have to understand what we are going into and we mustn't throw caution to the wind. Certainly, having a good understanding of the macro economic factors is important in property investments, knowing what moves and breaks the market.

I had a chat with a friend who owns 2 mickey mouse apartments in Telok Kurau. He's still very optimistic and is contemplating to buying another unit if 'rental market can hold'. He said he knows somebody who has 7 units! And he tried to convince me that I should consider too. My response to him? I'll try to sell my sons to raise some money first. Then I'll go to the casino and roll it bigger. If everything goes well, I'll buy a row of GCBs on Nassim Hill! LOL~

Those people who saw the extremely high ROI investing in shoeboxes in the last few years and those who have missed out (like my other friend who lives in Amsterdam) are rubbing their hands together, all eager to take another BIG gamble. Much as we can share facts and personal experience to 'remind' them, it is really still up to them to make the final call. We can only say good luck when interest rate rises and the supply glut kicks in. The first to see vacany rates rising are those in OCR where birds won't even lay eggs there.

In the early 2000s, a 3-bedder condo unit in the OCR asking for $1400 per month had no takers for months. In the end, it was rented out at $1200. That was the time when interest rate was 6-7%. I wonder how much OCR shoeboxes can fetch when the perfect storm brews.

AK71 said...

Hi Endrene,

I know what you mean. People are getting drunk on cheap debt. Some are so inebriated that they are probably badly poisoned. -.-

I cannot remember the statistics but I won't be surprised if more marginal property investors form at least 15% of the property investment community.

I will always remember an account of an investor who had 10 properties during the last property boom. When the tide started to go out, 2 properties stayed vacant. Still OK since the rental income from the other properties could cover all the mortgages. When 4 properties stayed vacant, things started to unravel. Then, it reached tipping point when another property stayed vacant.

A friend of my dad's had 4 private properties during the early 90s. When the AFC came, they stayed vacant and he had to sell 2 at a huge loss to keep the other 2. He could keep the other two partly because he had other sources of income. Imagine if property investment was his only source of income. It would have been hell.

Investing in properties is like investing in stocks. It is not about affordability. It is about value for money. Of course, it is all relative.

It is also important to have a sizeable war chest ready. If banks should come a knocking or if interest rates should shoot through the roof, we would be thankful we have a war chest ready.

AK71 said...

More private property buyers are choosing smaller units, according to analysts.

They said they have observed this trend after loan curbs were implemented in June.

They also said that they expect private property prices to remain stable in the next few months, with properties priced below S$1 million being the most popular.

Ku Swee Yong, CEO of Century 21 Singapore, said: "Buyers are now a lot more limited by their budgets because of the Total Debt Servicing Ratio consideration. So I think in the next 12 months, the more popular units would still be the smaller-sized units."

http://www.channelnewsasia.com/news/business/singapore/more-private-property/852556.html

AK71 said...

"Prof Lum also made a good point on how due to Singapore's demographics, demand will not support higher prices of housing in future. Bigger flats will go down in prices faster than smaller flats as seniors downsize their homes, monetizing their bigger flats."

Source:
Housing and the CPF.

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