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Why You Need to Pay Attention to Falling Property Prices

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The Motley Fool Singapore

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With property prices set to drop across the rest of the year, property speculators are already salivating at the prospect of purchasing property at under-value prices. But what sort of impact does the property market have for investors in the stock market? The Motley Fool gives us some insight into this: In the past few years, Singapore has seen growing property prices amidst a low interest rate environment. However, the series of property cooling measures that were put in place by the government, coupled with the threat of possible interest rate hikes, have taken their toll on the sale of private residential properties recently.

Over-supply Conditions: Houses Aren’t Being Sold

As of April 2014, the situation looked pretty gloomy for property developers according to a recent report from the research arm of realtor HSR; over 50 private residential development projects saw a take-up rate of less than 50% over the past four months. In fact, there have even been two separate projects that have not experienced a single sale between Dec 2013 and April 2014; the first project is a joint-venture between Hiap Hoe (SGX: 5JK) and Superbowl (SGX: S48) while the second project is from Regal Development. Some of the other projects with particularly poor sales that are mentioned in HSR’s report are shown in the table below.

Project Developer Cumulative take-up rate as of April 2014
Cosmo Loft SingHaiyi (SGX: 5H0) 8.9%
8 Raja Popular Holdings (SGX: P29) 7.7%
One Balmoral Hong Leong Holdings (SGX: H22) 7.7%

Source: HSR report

Furthermore, the problem for developers of private residential properties is exacerbated as the Housing Development Board has started to increase the supply of new public housing units under its Build-to-Order and Sale of Balance Flats schemes. For instance, 6454 flats were just launched last Thursday under those two schemes by the HDB. This will increase the housing options for many Singaporeans and provide a potential lure away from relatively pricier private apartments.

Developers Set to Cut Prices to Move Units

Back in April, CapitaLand (SGX: C31) was one of the most high profile developers that had cut prices for its projects in order to move sales. As reported by The Straits Times in a 21 April article titled Sky Habitat relaunch draws crowds with lower prices, CapitaLand reduced prices for its Sky Habitat project – the initial launch two years ago saw selling prices of S$1,435 per square feet (psf) to S$1,893 psf; those have been pulled down by 10% to 15% to range between S$1,276 psf and S$1,590 psf – and managed to move 80 units in just one Saturday. With one of Singapore’s largest developers cutting prices and seeing a positive reaction, smaller players might just follow suit. This is also a view shared by HSR’s research team, who also noted the positive reactions to CapitaLand’s price adjustment in its report that I had referenced earlier. Business newswire The Business Times had recently reported on the same phenomena of developers cutting prices in a 16 May article titled Price cuts revive April private home sales; further discounts expected. In it, the journalist spoke to CBRE research head Desmond Sim, who gave a very logical explanation and rationale for developers’ willingness to cut prices. The journalist wrote that Sim had mentioned that “Pushing sales through discounts, even if it eats into profit margins, also helps manage cash flow which is needed to finance ongoing construction costs.”

Foolish Bottomline

So, how do all these developments – poor sales uptake in private residential projects in addition to developers pushing through price cuts – affect investors in the stock market? Investors interested in property-related counters may have to focus on the ability (or lack thereof) of property developers in selling their properties. That’s in addition to paying attention to the current situation regarding a lukewarm reception from property buyers for new private housing projects.

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  • praticalsolutions

    Thought I did the right thing by buying an inexpensive house and then taking out a home equity line to make improvements. The total debt was less than my annual income. I assumed the line of credit would roll over without a problem at the end of it’s ten year term so I continued to use it to complete projects on the property. However the value of the property has fallen to barely more than the limit on the line of credit so the bank will not roll it over. So I might lose the property without ever having missed a payment and while keeping the debt well within my ability to pay and my keeping my debt to income ratio quite low because nothing is selling in my county.