The Singapore Property Market has gone quiet of late - thanks to the spillover effect from the stock market - with current property transactions having fallen drastically as compared to last year.
Naturally, most prospective buyers are hoping for property prices to fall so that their dream home purchase would be more affordable.
These people are going to be disappointed if they are expecting prices to fall significantly below current prices in the near term.
Current demand is subdued only because of the twin illusions of hope and fear (that prices will fall further), when in truth, current prices are actually fundamentally well supported.
Without mentioning the Integrated Resorts, F1, or even the Youth Olympics, these are the factors that support my opinion:
Mass market demand is still strong, albeit for now:
There were 3,500 applicants for the recent DBSS public housing project City View @ Boon Keng, meaning that it was 4x oversubscribed despite initial reservations that it was overpriced.
Property developers unprepared to lower their launch prices:
Mr. Kwek Leng Joo, Managing Director of City Development, remarked on 28 February 2008 that even if the market recovery should take place a little bit later than expected, it will be OK.
In short, the group can afford to delay launches of new residential projects if necessary to ride out the current weak sentiment.
Clearly, Mr. Kwek's opinion is that the current weak sentiment will be short-lived. That is not to say that he cannot be wrong.
Rental Yield remains strong at 4% to 5%:
As Singapore's population continues to grow, many residential landlords continue to enjoy high rental yields.
At the same time, housing loan interest rates have fallen to below 2.5% currently.
This creates a situation whereby the mortgage repayment would probably be lower than the potential rental, which will ultimately lead to an increase in demand for properties for existing and prospective landlords.
Construction and land costs are still high:
This means that new property launches will definitely have a high minimum price in order for the developers to earn a minimum profit.
On the other hand:
There is of course the possibility that property prices will start to fall.
That will happen if some of the smaller property developers or retail speculators who are over leveraged, start to lose their nerve and decide to sell their properties are whatever offer price.
However, once that starts to happen, because I feel that current demand has not disappeared as much as that it is just apprehensive, it is more likely than not that buyers will then start to slowly trickle back into the market.
This will then provide the price support once again.
At $1000 psf, an average size condo of 1000 sqf cost S$1 million.
Rental yield of 5% implies a yearly rental of $50k, in order to pay for that kind of rental, household income has to be around $200k per yr, example, more than $16k per month.
I would estimate less than 5% of Singapore workforce earns more than $16k and personally even if my household earns this much, I will not fork out $50k on rental. ie would rather downgrade to live in some ulu places etc. By the way $50k would probably be the average income for Singaporean workers.
I guess the bottomline is that rental at $50k per year or $4k per month is not sustainable without significant income growth.
Similarly I guess the same argument goes for expats. Expats may enjoy a higher average income say maybe $100k or something (just guessing here) but it's a stretch still for companies to fork out $50k on for rental to hire someone with a salary of $100-200k per year.
The property market is on precarious grounds. It rallied too high and too fast. The sad part is that HDB, instead of standing by its objective to provide affordable housing, joined in the fun thereby squeezing lots of would be buyers.
The people who bought the new City View @ Boon Keng must have a combined income of under $8k in order to qualify for it.
Yet some of these people are willing to pay $700k for a flat, and take on a huge mortgage loan that would probably be beyond their means.
It seems our new generation has gotten used to the idea of living in debt, and idea no doubt supported by the HDB.
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