FOMO in Singapore’s Private Properties

2 weeks ago JCprojectfreedom 0

Prices of private residential properties rose 1.5 percent quarter-on-quarter to hit a five year high. This new high was achieved despite new cooling measures in July 2018 which cause property prices to be subdued for two quarters and inventory of unsold private properties are increasing. In this article, we look into why private properties prices are increasing and why FOMO may not be wise at this junction.

Cooling Measures

Cooling measure policies will prevent property bubbles and achieve a stable market, it weeds out speculators in the short term but those who are forced to sit on the sideline will create a strong demand when the effects of cooling measure taper off. People will rush in again when they see the prices are rising and they fear that they will be priced out again.

Unsold Units + New Units + Enbloc New Projects

With demand increasing, the number of unsold private residential units eased from 37,799 units in first quarter to 34,486 units in second quarter which is a 10 percent decrease. Developers are hoping to clear all its unsold inventory over the next four to five years to avoid the Additional Buyer Stamp Duty penalty. These units will need to compete with new few thousand new units which are new to the market.

The profile of the buyers are 80 percent Singaporeans, 12 percent Permanent Residents and 6 percent foreigners. The recent en-bloc fever from 2016 to 2018 has injected $20 billion into more than 7000 owners with an average S$3 million. The chance of winning is higher than buying TOTO. The developers need to sell their new projects at a higher price. The majority of recent transactions for both new and resale private homes are between S$1 to S$1.5 million when 5 years ago, bulk of the purchases were below S$1 million.

What does all these mean?

Property in Singapore will generally rise in value along with inflation. However, there are years when buying a property does not guarantee that you make money but you can lose money. When you are buying a property with only 25% down payment, it means you are borrowing from the bank the remaining 75%. 75% loan means you are geared 300% or 3 times. We assume that we can always hold our grounds in the event that property price drops, we just stay in them and ride out the cycle then sell it during the next upturn. Sounds familiar? When property prices drop drastically will usually mean that there is a recession in Singapore. This will create challenges in holding on to employment. In the event of unemployment, do you have :
1. Emergency fund to ride out the storm to land the next role
2. Extra fund to top up in the event of margin call from the bank for your property in the event of drastic drop in property price.

Some of the investors buy a property to create a secondary source of income from rental. However, if your rental yield (based on the latest properties prices in Singapore) is around 2% after less all cost. Inflation will wipe out this 2% yield. If it is less than 2%, I will rather use the fund to buy REITs. You may argue that the rental yield should be higher because it is based on 25% down payment. The risk reward ratio does not justify this investment. What if you cannot find someone to rent your property? The number of months without a tenant will dig into your cash savings.

Like all bubbles, it does not pay to short it, because you never know how long this trend will persist. The Singapore government will not want the bubble to burst suddenly as it will affect our local banks drastically as their portfolio consists of Singapore property mortgage. The Singapore government will control the public housing and let the free market forces dictate the private property market.

I hope we can stop rushing in, hoping that the property prices will continue to appreciate. Let’s evaluate whether there are better ways to deploy your capital.