Property Hype?

Market is a little crazy these days. Been hearing about the effect of displacement from two people in the real estate industry. Recently the owners of Gillman Heights and Minton rise were given their proceeds from their collective sale of their respective properties.

Just a little background: Gillman Heights' owners had some dispute of their own about the way the sale was conducted but eventually the courts ruled that the sale had to go through and the $548 million sale of the condominium to Ankerite Pte Ltd (A subsidary of Capitaland) was completed. The Minton Rise ding dong went from the start of the boom till the end of it but eventually Kheng Leong secured the deal. Thus these 2 deals are perhaps the last deals to be concluded from the whole collective sale fever which started around end 2006. In total there were approximately 70 enbloc deals concluded in the 2 boom years which preceded 2006.

So was there really a property boom due to the fact that people's income had increased? (Which in my opinion would constitute to a more legitimate spike in prices) I feel that the price spike of the last 2-3 years was mainly due to the fact that these owners were given a large amount of money to move out of their current house and thus went on a shopping spree. Let's stop and think first: Is enbloc really a fantastic deal for owners?

Let's say I am an owner of a property in Sophia Court at Dohby Ghaut and I just received $800 psf for my unit from a developer. If I am currently staying there I will be forced to purchase a unit. However what can I purchase? Enblocs usually happen during a property boom when developers are bullish about the real estate market in the medium term and thus most probably prices are rising. I won't be able to afford a property in the same vicinity already. I will be forced to downgrade to either a smaller unit in the same area as the per square foot price should be much higher than what I received for my unit or I will be forced to look for a similar sized unit at a less price location. Who wins? The people who held the property as an investment and not for self consumption. The rich get richer.

The boom which happened at around 2007 and the early part of 2008 was really down to the displacement effect. The fact that someone had to move out of a private apartment in Farrer Court and was handed a few million dollars in his hand could just walk down to a flat in Jln Membina and pay in excess of $100,000 above value for a 5 room flat. As the enbloc fever rose, so did the cash above value and today it is mandatory for a seller to ask above value when he sells a flat.

No body's pay increased. No body's disposable income increased. The only thing which did increase is the proportion of income spent on housing repayment. Look at taxes, look at rice and oil. Everything went up and inflation hit a high. Singaporeans' pay did not inflate at the same rate as goods and services and most importantly not as quickly as housing prices. (data from www.singstat.gov.sg)

The cause for the recent mini euphoria in the real estate market?
1) Pent up demand. Buyers have been on the sidelines for too long. People still need to get a place to live. First time buyers in the market actively seeking for a place have been on the fence for too long
2) Displacement in Gillman Heights and Minton Rise.
3) Stock market euphoria. Many think that the real estate market tracks the stock market and that we are on an extended bull run. Or what I'd call a cocaine loaded red bull run. I'd agree with the bull run in stocks. I'm bearish on real estate. The last recession it took a good 3-4 years of correction in the real estate market before a bull came into the property sector. We're not even halfway through correcting yet.
4) Developers' good and astute pricing strategy. Developers are launching units whereby the absolute price of a unit is seemingly cheap. A studio at Alexis sold for a low absolute price of about $500,000++ but let's face it, it's only 300 plus square feet which is more like buying a freehold bird cage at more than a thousand dollars per square foot. Buyers seemingly do not have good sense to use a calculator.

Personally I do not see the market going up on a bull run. This is just a small breather from the larger correction which is about to happen. Property is one of the most illiquid asset that a person can hold on to. Therefore it is also something that people are afraid to commit to in times of uncertainty.

My personal view: Prices should come down about another 10-20 percent before buyers step in. Of course there are actually some bargains out there but in time it would be much easier to spot a bargain when prices have eased.

Sellers don't be greedy. The green shoots are not out yet. At least not for the Singapore economy and most certainly not our real estate market.