Private property market in Singapore to crash in late 2011?

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Private property market in Singapore to crash in late 2011?

Postby Admin » 12 Jan 2011, 21:04

Will the superheated state of property price continue to increase or will we be able to sustain property prices for long in this superheated state? Will we be able to take a second wave of superheating in 2011 without the market come crashing down? I think everything goes up must come down and the higher it goes up, the harder it is when it eventually comes down.

In 2010, overall private property appreciation reached around 16%. A condominium selling for 600k at the beginning of 2010 ends up selling for around 700k by the end of 2010. Prospects are looking good isn’t it? Or is it just too good to be true.

Astoundingly, 2010 saw property prices soar past the peak of 1996 (*0) (pre property market crash in 1997). Is a condominium selling for 700k really worth 700k in a normal and not superheated property market state?

Do we expect another 16% gain this year to make it a total of 32% gain from 2010 to 2011 or is this just a mere fantasy going on in the mind of potential speculators?

The current situation sees the private property market in a superheated state, contributed mostly by the speculative market prior to the changes introduced by the government in August 2010. The strongest impact to hit speculators will be the policy stating that private property owners must now own their property for at least 3 years before selling, or they will end up having to pay a seller’s stamp fees amounting to the full sum, 2/3 sum or 1/3 sum when they sell the property within 1, 2 or 3 years respectively. With sums of easily more than 15k payable as stamp fees (*1), potential speculators are becoming more cautious when it comes to speculating in property. A potential speculator who owns a private property now, thinks even further on the probability of fetching a good price in the future, with the future buyer having the concern of the seller’s stamp fees in his mind.

The next impact to the private property market comes from the launch of 22,000 new flats by HDB in the year 2011(*2) where more people will see themselves getting homes and doing away with the need to rent a place from someone else. In additional to that, more land is being released for flats under the DBSS and Executive Condominium schemes. These launches and releases will confront the private condominium market head-on with competitive (or rather I should say, cheaper) prices and certain subsidies. These launches of new units and release of land for development will directly cushion the demand for private condominiums. What happens when supply exceeds demand in 2011?

The government always thinks ahead and it already sees the private property prices going into a superheated state. Bursting of the bubble in the private property market will see property prices come crashing down. It is a national crisis and because of the magnitude of such events, the private property market must by regulated. Then again it must not be overregulated; if not it defeats the term “private market” when there should be more freedom to allow the people in the market to determine its market value. However much the government wants to prevent the bubble from bursting, the forces of the private market cannot be neutralized with a few soft measures. In fact soft measures will delay the bubble from bursting but significantly, potential speculators will delay pushing the speculative market further, resulting in a super cool-off of the market first, especially in smaller sized condo properties that are good for rental.

The chain effect sparked of by potential speculators withdrawing from the market due to the new policy and also the release of more flats by HDB will see more people getting homes and rental demand should logically go down. Rental yield should follow the decreasing rental demand and lower to 2% - 3% in non-prime areas. More people will get homes and rental demand should logically go down. This effects caused by the sparks then compounds on each other, causing a vicious cycle as potential speculators will avoid entering the market due to decreasing demand for rental and decreasing rental yield. This causes private property prices to drop further, with rental rates following suit as an effect.

Though the government has delayed the bursting of the property bubble with this super-cool off, the government cannot help those speculators who already are paying for a private condominium and are operating at a deficit in the event of the loss of his tenant. In such cases where the speculator cannot afford to pay for the housing loan (bearing in mind the impending increase in the housing loan rates), it would be logical for speculators to do force-sells or the bank / finance institute will “gladly” do it for them.

The supply market is already on the high side by the end of 2010 and we’re seeing more supplies then demands especially in the small and medium sized private condo properties. Prices have been nearly stagnant since around October 2010 till January 2011, which is a drastic change from the aggressive performance displayed in the first and second quarter of 2010.

Overall, private residential property saw prices increasing in the following quarters in 2010 (*3):
1st Quarter – 5.1% (Aggressive!)
2nd Quarter – 5.3% (Aggressive!)
3rd Quarter – 2.9% (Effects of policy introduced in August 2010 starting to kick in)
4th Quarter - 2.7%* (Effects of policy introduced in August 2010 continue to kick in)
*Do not be mistaken by the 2.7% increase in property value in the 4th quarter of 2010 as December 2010 saw some private property prices already on the decline. The 2.7% increase was the overall result over the whole of the 4th quarter 2010. This is an indication of the awakening of people in Singapore on the psf prices being on the very high side.

The policies are likely to suppress the private property market further and with the potential of increasing housing loan rates, and the drop in rental rates for non-prime areas, I foresee intelligent speculators withdrawing from the market soon, resulting in lesser buyers and more sellers in 2011. In furtherance to all these, we have yet to factor in the butterfly effects of the property crisis hitting certain countries now, one of which includes the “big brother” of Asia, China.

“The first half of the year (2011) will be a hard time for the property sector” (*4) said Chen Dongqi, deputy chief of the Macroeconomic Research Institute under the National Development and Reform Commission, China.

“Property prices will fall in the first six months of 2011, though by less than 10%” (*5) according to Liu Shiqing and Xu Shengli, analysts at Essence Securities in Beijing. There is currently no optimistic assumption that the property market will rebound throughout the year of 2011.

India also expect prices of residential properties in some parts of India that are near to the peak levels of 2008 to fall by 10% to 15% simply due to people being unwilling to pay for high prices (*6). It’s an awakening of the public to the current high psf price similar to our situation.

The approach towards curbing the inflation of the private property bubble may seem gentle and even arguable soft. It was meant to cool the market so as to mitigate the risk of the bubble bursting. More aggressive and forceful policies must have been considered along the line, however introducing tough policies in a democratic country is likely to incur the wraith of the public, and this is not what the government wants, especially so with General Election around the corner. It must have been a tough time trying to come out with policies that works to soften the property market, won’t be too drastic so as to retain votes of their supporters.

However with the inadequate number of subsidized flats launched over the past years being one of the factors resulting in a speculative market (in the private property market, specifically), it will definitely come as a blow for the PAP in the coming 2011 election. While some may guess that the PAP will lose votes over this issue, I am more inclined to agree with Straits Times’ worry for Minister Mah Bow Tan (in particular) to lose votes over this issue (*7).

However with a super cooling effect (quick deflation) second from the worst case scenario (compared to a property bubble burst), it is essential that the government holds the election early in 2011, preferably in the first or latest by the second quarter. Though the latest date for the General Election to be held will be in February 2012, PAP will need to quickly make this General Election take place before the general public sees significant depreciation in their newly bought property, or PAP will be destined to lose a lot more votes. My guess for the best time to hold the General Election will be sometime in March 2011.

I expect this super cool-off to cause private properties in the overheated state in Singapore to drop by 15% to 25% by the end of 2011; with intelligent people holding on to their cash and frantic owners trying to sell their private properties at the beginning of the second half, only to find it hard to get buyers. I think the first quarter of 2011 will be an exceptionally good time for small to medium sized condominiums to fetch the highest market value, with prices stagnant at its peak now. Suggestively, sell before the 2011 General Election and not later than the 2nd quarter of 2011 (meaning by June 2011).

The first wave of dipping of the private property market should come when HDB launches the 11,000 new houses by the first half of 2011. The final blow will come in the second half of 2011 with the 2nd batch of 11,000 new houses be launched.

Is it time for speculators with private small to medium sized condos to consider selling them now? Is it better to reap the profits and wait for the super cool off or is it better to end up with a depreciated property with no tenants to rent to, and an increasing bank loan interest rate? Remember, during a property down-form, your property value / rental yield depreciates / lowers, but your original loan amount remains the same and increasing bank loan will force you to squeeze out more money to finance a house below a value that you originally bought it for.

It is just too bad for people buying in during the first half of 2011. It is just too bad for those who either didn’t know about the new policies or who knew about them and just didn’t believe that it will (continue to) work.

A sincere advice would be for people who intend to rent a private property in Singapore to stay in, it would be advisable to do so only after the prices goes down and go for shorter term contracts. Remember if you signed a tenancy contract for 1 or 2 years at the beginning of 2011 at S$3,000 per month, you will not get any refund when rental rates at the later part of the year drops to say S$2,500 (Or lower!).

Go for it now (sell) before the signs of super cooling effects start to kick in further and deeper!

*0 Reference The Temasek Review on Mah Bow Tan: “Cooling measures” will take a few more months to work

*1 Stamp Fees = 1% of the first 180,000 + 2% of the subsequent 180,000 + 3% of the remaining price of the property. Therefore stamp fee for a 800,000 property will work out to 1800 + 3600 + 13200 = S$18,600/-

*2 Reference information found on HDB InfoWeb on press release issued on 30th August 2010

*3 Reference URA’s website on Latest News Releases for the Property Market

*4 Reference news on Property Wire on “China Bracing itself for new property cooling measures in 2011”

*5 Reference news on Property Wire on “China Bracing itself for new property cooling measures in 2011”

*6 Reference news on Property Wire on “Property Prices in India expected to fall in 2011”

*7 Reference article at The Temasek Review on “Straits Times worried that Mah Bow Tan will lose votes”

This article was written by someone who knows nuts about property and politics, but is just good at putting pieces of the puzzle together.
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