Property Prices Continue to Defy Gravity

In this case, it is financial gravity as dictated by the median income of most Singaporeans versus the value of homes being offered in the market. Recent news articles on our ever-hot property market has literally “forced” me to write once again on this pervasive yet intriguing phenomenon. With elections around the corner on May 7 and Nomination Day being tomorrow the 27 April, this hot-button topic would surely be fiercely debated over the nine days of campaigning, with most of the salvos being fired at our Minister of National Development Mr. Mah Bow Tan (“MBT”) who heads a GRC in Tampines. Let’s look at the facts and numbers and I will draw some conclusions from there.

On April 16, 2011, it was reported that the March 2011 numbers showed that sales of new private homes was up 25% to hit 1,386 units. If we add in EC sales, the number jumps to 1,543 units. There was also reportedly sustained demand from HDB upgraders, who ostensibly have the cash and asset backing to purchase investments in private property, even though the January 2011 cooling measures have limited the mortgage loan quantum to just 60% of home value, down from 70%. Quite a significant proportion of the sales was also driven by “Mickey Mouse” units less than 500 square feet, and most analysts are either bullish or feel that this is ordinary and that no bubble is forming, despite the persistence of historically ultra-low interest rates which has seen loan demand surging for local banks.

The most recent news was April 19, 2011 when it was reported that project launches were accelerating as developers feel that HDB upgraders had the appetite and propensity to purchase even more units. This started off with Eight Courtyards in Yishun reporting that 202 units out of 656 units were sold during its weekend preview. Its tenure is 99-year leasehold and it is selling at about $795 psf, which means a decent three-bedder (equivalent to a five-room HDB flat) would set you back by about $700,000 to $1 million. Quite shocking when you consider that you are essentially getting the same space for almost double the price, plus some amenities thrown in (which you ahem, have to pay for of course) and probably a perimeter wall and security guards thrown in. Other recent launches with healthy responses include Hedge Park in Flora Drive (Changi), Skysuites 17 and Centra Heights (Sims Avenue); all of which are selling at about the same price. It’s hard for me to imagine myself shelling out $1 million for a unit which is about 1,200 square feet, while a spacious 5-room HDB flat costs around $600,000. More on HDB flats later.

The problem with the news articles on Straits Times and Business Times is that they are all in-line with MBT’s “Asset Enhancement” long-term strategy. When recently queried by the Worker’s Party on the sustainability of high HDB prices, he retorted that all HDB flats are continually undergoing asset enhancements whereby upgrading and refurbishment is done every couple of years, and so Singaporeans can enjoy an asset which will continue to appreciate in value. While I can appreciate (no pun intended) his logic in giving Singaporeans an asset which is worth something, he fails to recognize that if this enhancement carries on for the next 10 years, we may see HDB flats being priced eventually in the millions of dollars, and already some “freak” transactions have resulted in HDB prices being transacted at $800,000 to $900,000 in prime areas, COV included. Unfortunately, on the other side of the equation are the yuppies, couples who recently graduated and found a job and have been working for less than 10 years; and who earnestly plan to settle down and (hopefully) arrest the ever-declining birth rate. With median income settling at $3,500 to $4,000 level, this means that couples have to take longer loans to cover the mortgage payments on these “enhanced” assets. Taking a 30 or 35-year loan is not my idea of “affordable”, as mentioned in a previous posting of mine on property. This effectively makes all Singaporean couples indentured “servants” for the rest of their working lives as they slavishly work to pay off their huge mortgage, ostensibly in the name of having an enhanced asset for their retirement. A classic case of “Asset Rich, Cash Poor”.

With the liberalization of the CPF OA to be used for housing, this has inadvertently and unavoidably caused housing prices to edge up, as Singaporeans’ retirement savings are being sucked away to pay for (over-priced) public housing. The newspapers frequently play up the dream of owning a private apartment by referring to “HDB Upgraders” and quoting residents making statements such as “It's a gold mine which will appreciate when more amenities like the Bedok Reservoir MRT station come up” (Article Reference: Prices on the Up and Up in Bedok Reservoir, Straits Times, April 7, 2011). The problem with such thinking is that everyone tries to sell out at the high and hopefully “downgrade” to a smaller apartment, thereby keeping the difference as cold, hard cash (after deducting the amount payable back to CPF OA + interest, of course). So it seems like a game of musical chairs as everyone continues to wait for higher prices, all fuelled by the media and its exhortations. An impending vicious cycle of epic proportions, perhaps?

Over now to HDB, it seems that an April 7, 2011 report stated that the HDB Upgrader’s dream is fast fading, with the gap between mass market condominiums and HDB flats growing wider as prices for private properties begin their ascent into the stratosphere. Prices of suburban homes are at historic highs, according to the article, and are fuelled by low interest rates too. Waterfront Isle in Bedok sold at $990 psf median, H2O Residences in Sengkang at $920 psf median and Canberra Residences at Sembawang at $830 psf, levels which are quite mind-bloggling considering a simple 1,000 square foot unit would cost close to $1 million! Over at Adora Green, a new DBSS project located in Yishun, prices for 3-room flats are in the range of $310,000 to $390,000 for a 720 sq ft unit, translating to about $430 to $540 psf. The 5-room flats are even scarier, being about 1,200 sq ft priced at $520,000 to $650,000. Considering DBSS has an income ceiling of $10,000 per couple, this still means the couple has to stretch their loan tenure in order to be able to afford the mortgage payments, a situation which saddens me greatly.

Interestingly, I do have friends out there who own two properties (one HDB and one private apartment) and are paying two mortgages. These were transacted before the new property rules came into play in January 2011. Most of the time, they are trying to play a risky game whereby they pay for their HDB using CPA OA, and then rent out the entire unit at 4-5% gross yield for cash in order to pay off the mortgage for the private apartment (using a very cheap bank loan with 3-year lock-in rates). The whole equation is quite sustainable until a few things start to happen:-

1. Rental Rates start to fall – When this happens, the cash flow from renting out the HDB will be unable or insufficient to fund the mortgage payments on the condo.

2. Lack of tenants due to increased supply of HDB and private property – It may become more difficult to find a tenant in the first place once the supply of flats increases and tenants are more spoilt for choice. Should this happen, the couple would have to cough up payments on two mortgage loans using their own CPF OA and cash reserves.

3. Falling Property Values – Negative equity may result and the banks may require a top-up on existing mortgage loan.

4. Interest Rates Rise – In the event that interest rates start to rise in 2012, the interest rate on bank loan for the condo which is pegged to SIBOR may also correspondingly rise, resulting in higher monthly interest payments which are unable to be fully covered by the rental of the HDB unit.

Assuming any or all of the above events occur at the same time, it would put a major squeeze on the couple in question and their cash flows would be severely disrupted, resulting in potential financial distress.

Hence, I always advocate a measured approach to property. Buy what you can afford, pay off the mortgage loan as soon as you can using only your CPF OA (as cash can be invested to yield 4-5%) and do not over-leverage as it is a risk to your cash flows. As to whether and when property prices will experience a significant correction, your guess is as good as mine; but note that the last major crash occurred in 1997 during the Asian Financial Crisis (2008-2009 does not really count as HDB Resale prices remained high, propped up by an steady influx of foreigners). With an event occurring 14 years ago, most of the current crop of couples in their 20’s and 30’s would not have recollection of the financial distress undergone by people at the time. Leverage can act as a double-edged sword so I feel compelled to thus sound a note of caution as euphoria and exuberance sets in.