Property Market Direction.

How to deal with the impending recession.

We know the crisis of epic proportion is going to hit town, how should we prepare ourselves as professional real estate agents, and the breadwinners to our family.

To begin with, let me say that we must be psychologically prepared that the population in the entire planet are going to be poorer than before. Some of the rich upper class will go down straight from the rich list to the bankruptcy list, starting with some top guns in many of the world’s leading investment banks, hedge funds, insurance company and many other private financial institutions who just a year ago were living the high life.

At the time of writing this article I did not know if the US$700 billion rescue package will be approved by the House of Representatives. But even if it does, the world will still have to go through some months of painful readjustments and recuperation as new realities set in.

The crux of the matters is that over the past six years or so, the housing inflation had also inflated the values of many companies, such as banks and major institutions, and emboldened many property investors, Singapore’s included. In short, the economy bubble was inflated out of proportion over the past years and it is still in the process of being put down to its correct size. In the process, spending will be curtailed, making the global economy look like an obese new recruit on his first day of Basic Military Training (BMT), trying to fit into a tight uniform. The moral of the story is: the fat boy needs to cut down the excess body fat very quickly by eating less and exercising more.

An old saying goes like this: “when US sneezes, Asia will have pneumonia”. But in today’s context, when the US has a tremor, Asia will have a tsunami. And as we are speaking, the sign of tsunami is ominous – the tide is receding and being sucked back into the sea, far away from the beach. There will be some moments of stillness in the air before the high waves strike. This time round, none of the economic sectors anywhere in the world could be spared from the fallout. In short, we are in for a rough ride from now.

We have to be prepared for widespread poverty, even in the world leading economy such as the United States and some parts of Europe.

What does that mean to the property market in Singapore?

In the first place, I would like to stress that not all ‘down trend’ markets are bad market for real estate agents. Though prices may fall by 5% to 10% in the next six months, the transaction volume is a different matter altogether. As far as property transactions (including sales and rentals) are concerned, there are many signs that point to an active year ahead of us – as investors and home owners alike are adjusting to their new circumstances.

§ More Sub-sales on the card

The record 18,000 sales of new home units achieved in 2007 and the ‘not-too-bad’ 11,147 sales of new home units in 2006 will combine to release thousands of completed new condos into the property market, starting from the early part of 2009 onwards.

More than 15,000 condo units are slated to be completed from the first quarter of 2009 onwards, with more than 8,000 units in the prime districts such as districts 9, 10 and 11; and another 4,400 units in the East Coast areas of districts 15 and 16. The rest of the thousands of new condo units will be scattered around the outlaying areas.

With banks tightening credit control, some of the property buyers who had purchased the properties on Deferred Payment Scheme might not be able to secure the financing and will have to dispose of the property in the sub-sale market.

§ More down-grading from condos to HDB flats

In fact, a ‘down trend’ market where some sellers are desperately trying to dispose of their units may be a good hunting ground for real estate agents of all shapes and sizes, whether rookies or veterans.

There may be more instances of condo owners wanting to downgrade to public flats due to the massive increase in costs of living in a condominium. With the new price hike in electrical tariffs from 1 October 2008 where average households will pay 21% more in utility bills, more ‘middle income’ households with a gross household income of between $5,000 and $10,000 with more than two ‘financially dependent’ children may have to adjust their lifestyle and spending habits – if they are living in a condominium.

This means that the HDB resale flat segment may experience a ‘mini-boom’ as it will become a ‘buffer zone’ in times of great ‘economic adjustment’. I expect younger 5-room flats to experience an increase in activities since the ‘middle income’ may not be comfortable to relocate into an old heartland area. Newer HDB precincts may offer a lifestyle concept that appeals more to the middle income group. In other words, I expect the newer HDB precinct to become the growth area in the next nine months to one-and-a-half year. [See case study in HDB price trend later]

§ Cheaper prices lower risks

In fact, from the list of 40 Best Selling Condos in Singapore in page 12 – 13 it is not difficult to detect the increased buying activities of mass market condominiums in the outlaying areas in the first half of the year, despite the fact that the US subprime mortgage crisis has already making regular headlines in the local newspapers.

The Best Selling Condo list has been dominated by transactions in Districts 5, 15, 16, 22 and 23 where the unit floor rate (i.e. per square feet price) are hovering from $700 to $1,200 for District 15 condos, and as low as between $400 and $600 for condos in Districts 22 and 23.

While the new home segment may take a hit in sales volume due to developer’s pricing strategy, the sub-sale market is more responsive to the basic market forces of ‘demand and supply’. As such, it is not surprising to see sub-sellers pricing their units on hand for ‘cut-throat’ prices that are lower than the developer’s listed prices.

§ Market Update

Property prices to drop by 20%?
Not this time, definitely

Some wishful buyers are hankering for the prices of their coveted properties to fall by more than 20% because of the looming global economic recession.

But the numbers do not add up to such a drastic drop in houses prices in Singapore – for at least the next six months. Here are some of the reasons why:

The rich lists have grown

There are three categories of wealthy individuals which are known as High Net Worth Individuals (HNWI).

§ Ultra rich – US$30 million per person

The ultra rich are individuals with investible assets of at least US$30 million. In Singapore, there are 1,000 such individuals with total wealth of US$159 billion.

Across the Asia-Pacific region, the number of this category of HNWI rose 16.4% to 20,400 last year. The number may drop back a little but as Asia is not as badly hit as elsewhere in the world, the rich list is not expect to shrink by much.

§ The rich – US$1 million per person

Next is the ordinary HNWI – individuals with at least US$1million in investible asset.

There are now 77,000 such wealthy Singaporeans, representing a growth of 15.3% annually, or 1.7% of the population. The total combined wealth of such individual Singaporeans grew by 18.4% to US$380 billion last year.

§ Emerging rich – US$750k to US$1 million per person Next level down the rung, the number of emerging high net worth individuals in Singapore also grew by 15% to 24,000 in 2007. Altogether, these people have a combined wealth of US$20 billion.

To be counted as an emerging HNWI, one must have at least US$750,000 to US$1 million in investible assets.

No doubt the asset growth of the ultra-rich in the region as well as in Singapore will slow down, it will not suddenly disappear. It may contract by 10% to 20% but the money need to be deployed somewhere for good returns, and the people working for the rich need to be put up somewhere when they trot the globe for investment opportunities. Granted, there will be some bad days at the office where there will be no sales but there is no reason for the property market to suddenly stop functioning altogether – there will be people jostling to get out and others trying to get in. The basic economics continue to function.

§ Singaporeans are all ‘house proud’

A recent report by Merrill Lynch and Capgemini found that the Singaporean HNWI have an average net worth of US$4.9 million, and it confirms that Singaporeans HNWI, regardless of their wealth, are indeed very ‘house-proud’.

They put 25% of their wealth in real estate with the rest in alternative investments like structured products, hedge funds and currency.

Though the same report also stated that the Asian high net worth individuals are likely to turn to fixed-income securities which are less volatile in the near future, there is nothing to stop them from buying into Orchard Road if the investment returns become attractive.

The report points out that in the longer term, the region's wealth will continue to expand at 7.9% annually - higher than the 7.7% global rate.

Singapore population has grown

According to National Population Secretariat, Singapore now has 4.84 million people living in the island city. Out of whom 1.2 million are foreigners working and living here.

Among the 1.2 million non-residents, 757,000 of them are on work permits, 143,000 on employment or S passes, and 85,000 on student passes, according to the Ministry of Manpower. The Ministry also said that the number of non-residents has been rising significantly since 2004.

Likewise, the number of permanent residents (PRs) rose 6.5% this year to 478,200.

This is THE statistics that we badly needed in this market – it is indeed a shot in the arm. It means that we are not speaking in vacuum. There are people to fill those condos, and new flats that are coming onto the property market later on.

The size of the population underpins the growth in real estate prices, including rental prices. Barring any more financial disasters which result in these 1.2 million foreigners being recalled home, there is going to be strong tenant base to provide the cushion for any future correction in rental prices. Or to put it another way, rents will not crash, barring a major disaster – man-made or natural.

Total quantity of residential units

How many houses do we have in Singapore? I can assure you that the statistics is quite reassuring. Let’s look at the numbers:

§ For public flats, there are about close to 900,000 HDB flats, of which about 30% are available for approved whole-flat subletting.

§ For condo and apartments, there are about 180,000, spread over 3,000 private housing projects. This number will increase to around 220,000 by 2011, if all the planned developments are built on schedule, which we now know is unlikely due to delays in legal completion of many huge en bloc sale projects.

§ For landed housing units, we have about 68,000 houses, out of which 25,000 are bungalows and the rest are semi-detached and terrace houses.

This means that had the economic bubbles not burst in the United States and Europe, there will be an acute shortage of rental properties in Singapore. This time round the consequences of the global financial fallout may not be so sinister for Singapore, because barely six months ago this country was still grappling with problems of burgeoning house rents, and lack of places in international schools.

Granted that home rentals will ease and landlords will have to wait for a longer time for an expatriate willing to pay the extortionist’s rents, but it is not all doom and gloom. At worse, we are going back to the 2006 situation where everything happened within reasons, and where nobody thought we were in an economic recession. The truth is that 2007 had made many people very greedy.

Taken together, we might have a difficult next few months when the entire global financial systems go through fundamental restructuring and major austerity drive, but the mid- to long-term prospect looks promising, especially for Singapore.

Investment is like F1 grand prix
Maybe we should look at a recent event for inspirations. The turmoil going on in the world now is like the Formula One night race – there are always accidents, mistakes, crashes, unexpected twists and turns, disappointments and jubilations, and along the way, very loud noises. But isn’t this why the crowd loves the race?

When it comes to property investments, it is like the F1 grand prix – so full of unexpected twists and turns, but ultimately the one who is able to take advantage of adversity will win the day.

All along, we in Singapore know the ‘who’s who’ in the world, but they don’t really know us. When the dust of the current financial crisis settles, Singapore will rebound and surge ahead faster than any regional countries; and with the F1 night grand prix being telecast ‘live’ all over the world, the world will get to know what Singapore is made of.

One does not get such a good opportunity to pick up a piece of the world’s most coveted real estate in Singapore. Last year’s prices were too high and too risky for wise investors to do that. Therefore, if there is no crash, those falling behind in the race have no chance to catch up and become the new champion.

This is really the opportunity of a lifetime.

How badly will the Landed Property Market be hit?
Let us not be alarmists

How have the recent poor economic numbers translated into real estate figures as far as the landed property segment is concerned? Can we expect the same trend that happens in the new home segment happening in the landed property segment?

Statistics don’t lie. The number of landed property transactions has come down considerably from the final quarter of last year, after the US subprime mortgage crisis first reared its head. The brief period of sanity in the property market in general has been replaced by a pervasive sense of apprehension, in stark contrast to the buoyant mood in the first half of 2007.

Let us look at some numbers and see how much the landed property market has been affected by the on-goings in the global financial market.

The landed property market hit its peak in May 2007, with a very impressive sale figure of 778 a month. That is an awesome figure considering the fact that the largest HDB heartland estate, i.e. Jurong West, has a monthly total resale transaction of around 190 flats. So, the transaction figure of 778 is slightly more than four times the size of the resale flat transaction in the largest HDB estate in Singapore. But, the buying frenzy lasted only three months and transactions per month trickled down to 191 units by the December 2007.

§ Fewer bungalows sold by end 2007

Among the landed housing types, secondary sale of detached houses came down faster than the other house types. At its peak, there were more than 100 detached houses sold in a month (e.g. 128 detached houses sold in May 2007), but by year end, the detached house transactions slide to a few tens in number.

Not Right to compare with 2007 bull-run
However, it must be pointed out that it is incorrect to compare the transaction figures of landed properties of 2008 with 2007 as the latter was an exceptionally bullish year for the real estate market in general. How often did we see audacious ‘flipping’ deals involving bungalows with the price tag of $9 million? It was not uncommon to see cheaper bungalows being sold in the sub-sale market for a $200,000 profit. Such was the speculative mood in the market where anything that could be put on the market, could be flipped instantly.

§ 2008 should be compared with 2006

A more realistic comparison should be with 2006 transaction figures. No one called 2006 a slump year; yet by comparison, 2008 looks much rosier than 2006. In truth, 2006 should be considered a year of upswings where the Singapore economy started to take shape after a long period of slump.

For example, if we use the period between May and August of 2006 to compare with the same period in 2008, one would find that more landed properties were transacted in the same period in 2008 (despite the fact that there are more sulking sellers this year).

The breakdowns are as follows:

§ In the month of May: a total of 124 landed homes were sold in May 2006; and a total of 195 houses were sold in the May 2008. (That was 57% improvement or 71 more houses sold this year)

§ In the month of June: a total of 89 houses were sold in June 2006; and a total of 170 houses were sold in June 2008. (That was 91% rise or 81 more houses sold this year)

§ In the month of July: a total of 77 houses were sold in June 2006; and a total of 177 houses were sold in June 2008. (That was 130% jump or 100 more houses sold this year)
In the month of August: a total of 105 landed homes were sold In August 2006; and a total of 119 houses were in August § 2008. (That was 14% increase or 14 more houses sold this year).

Prices have held steady so far

There is another indicator to gauge whether property investors are worse off today when compared to a similar period previously, i.e. the asset prices.

Let us look at the landed property market from the perspective of transacted prices to determine whether property sellers need to be alarmed or whether the buyers should pay more attention to attributes that will protect their investments from the major market shocks, such as the current financial market meltdown.


§ Landed home prices sustainable

On the other hand, there are no compelling reasons for landed home prices to go below the 2006 price level. Prices will continue to hold firm while the number of transactions ease amidst more uncertainties in the near term. Here are some of the factors that will continue to help sustain landed home prices:

(1) The Singapore economy did perform exceptionally well in 2006 and 2007 periods after the economic restructuring; and Singapore had witnessed three consecutive years of very robust growths.
(2) Massive inflation has pushed up the prices of all commodities, including construction materials such as steels, sand, and labour costs. The prices of one property are often influenced by the prices of its substitutes. In this case, it will never cost cheaper than 2006 to build a house now and even in 2009 and beyond, given the many massive government projects that will commence construction from next year onwards. The Sports hub is one case in point.

(3) The supply of new sites for landed homes is drying up soon. There will be around 72,000 landed homes by 2011. The numbers are finite and as such, the prices will not fall easily.

§ No basis for comparison

Let’s look at other reasons why the performance of landed property segment cannot be compared with the non-landed property segment, especially the primary home market which looks set to get a nasty bash in the next six months to a year.

Future is bright for landed properties

Landed homes are different cattle of fish, so to speak. They are subject to different fundamentals having the scarce resources, i.e. land, to underpin their value. The profile of landed property owners is also different from condos and apartments.

§ Interests in D15 and D19 sustainable

In times of great uncertainties such as now, more conservative home owners will take advantage of the general weakness in sentiment and prices to buy into neighbourhood of choice.
One example is the sustained demand for houses in District 15 and District 19 landed homes. In fact the transaction volumes of these two residential districts were strong in the first half of 2008, despite the global financial uncertainties In fact, the transactions of landed home in District 19 consistently make up more than 20% of the overall landed home sale figure in Singapore.

§ Less speculative buying of landed homes

Landed homes generally cost higher prices and require higher upfront cash payment in the purchase. As such, they are less vulnerable to speculative buying, though there were a number of isolated cases of ‘flipping’ of bungalows being spotted last year.

Due to the stability in buying behaviours and price trend, there should not be much fluctuation in landed home prices from this point on, unlike in the non-landed segment where some degree of speculative buying (many on Deferred Payment Scheme) had resulted in unrealistically high prices.

§ Ownership restrictions of landed homes in Singapore

Permanent residents and foreigners not residing in Singapore have to obtain special approval to own a landed property for their own use. They can only own one landed property and are not allowed to rent out the property under any circumstances.

Conclusion

All said, it does not mean that the landed property segment will be totally insulated from the global financial turmoil that is raging in the US and Europe right now.

Quite the contrary, we may still see some isolated distress sales going on if the current financial crisis drags on. But even when that occurs, it will be more like a cyclical adjustment, according to the general economic climate, rather than a massive and panic sell-out that is very likely to occur in the condo segment next year.

HDB resale flats may benefit from the slump
Underlying demand is still strong

Is the HDB resale market insulated from the on-going crisis? Or will it benefit from the likelihood of a horde of down-graders from the private condo?

It is anybody’s guess how the HDB resale market will react to the incoming recession from this point on. But, HDB resale prices have just received a boost from the recent market correction of the private property segment, and the down-grading trend may have started from beginning of the year.

I have done a case study on the HDB resale price trend and discovered that despite the bull-run in the private property segment in 2007, the HDB resale prices did not react much to the booming effect. But contrary, when the bull-run came to an abrupt halt in the fourth quarter of 2007, the HDB resale prices gained a hefty 10% to 15% from the end-2007 price point.

§ Finding of case study on 3-room flats

Traditionally, the demand of 3-room flats often comes from wider and varied sources, including new citizens, newly married couples, lower income groups and retirees. In view of the impending economic recession, the demand is expected to remain strong for 3-room flats in general.

§ Finding of case study on 4-room flats

Apparently, the historical price trend of 4-room flats across the nation tells more or less the same story as the 3-room flats. Resale prices of 4-room flats in general had received a tremendous boost by the slumping of the private property market.

§ Finding of case study on larger flats

The price increase of larger flats is more pronounced especially when compared to the same period last year. For example, while the percentage increase of the prices of 4-room flats in general was about 15% - 20% year-on-year; the percentage increase of the prices for larger flats was about 20% - 25%.

The massive price increases of larger flats may be due to the age-long ‘middle-income squeeze’ where the middle-income families, due to the current economic uncertainties, decide to move into larger flats rather than taking the financial risks of owning a private property.