In news slightly less surprising than “Ice cream is cold, not hot”, resale flat prices are up 1.3%. Property analysts are in for a busy week of acting surprised, and…wait. You didn’t see this coming?What sort of person doesn’t spend 119 hours a week tracking property news, so they can predict these things? “People who have a life.” HEY, I had a life too. Then I became a finance blogger. Nevermind, I’ll explain the price rise to all the normal people:
How Bad is the Price Rise?
“Resale prices of public housing flats rose by 2 per cent in the third quarter over the second quarter to hit a record high.
The Housing and Development Board (HDB) said on Monday that its flash estimate of the 3rd Quarter 2012 Resale Price Index (RPI) stood at a new peak of 197.9.” – Channel NewsAsia
This is a record high, but with prices rising rising from 1.3% in July, it’s not surprising. These, we feel, are the main reasons:
1. Deviant Prices
Those resale flat prices are insane; you’d think some buyers went a little crazy this quarter. That maybe, someone went and bought a resale flat for a million dollars or something.
And to top it off, some news media and property “analysts” fuelled the fire with their comments. Oh wait, that totally happened.
A kiasu attitude is standard amongst local property owners: When their friend sells a flat for $600,000, they’ll price their own flat at $650,000. Not so much on actual merit, but because: “How can his house be worth more than mine?”
Combine that mentality with unregulated cash-over-valuation (COV), and news of a million dollar resale flat. What do you think will happen?
The end result is an upward price spiral, as sellers mistake deviant sales for plausible market prices. Some of these sellers will be met by herd-mentality buyers, who accept the inflated prices because of unrealistic expectations. And the unsustainable chain continues, until the inevitable landing.
2. Alternative to Private Property
Low interest rates and high capital inflows drive up the cost of private property. Despite collecting half a billion in stamp duties, government cooling measures haven’t slowed the number of foreign property buyers.
Condos and landed property are the first to be affected. Wealthy foreigners outbid locals on such desirable units, forcing us to find cheaper alternatives. Think of it as a foreign invasion; but instead of using guns, they literally spend you off the land.
The next step down from landed properties and condos are resale flats. And as the price of landed properties and condos rise, more buyers will favour resale flats as an alternative. In time, the prices of resale flats will inevitably rise as well.
3. We Can’t Shift the Core Demand
HDB is planning to launch more BTO flats. But trying to cool the resale market with new flats is like trying to cool my living room by turning on my car’s air-conditioner: We’re dealing with two separate groups of buyers.
Demand in the resale market comes from buyers who, for the most part, cannot shift their demand toward BTO flats. Examples include Permanent Residents, or people who cannot handle the three year wait for a BTO flat.
Do remember: Besides taking two to three years to construct, an applicant may not be successful on the first ballot.
The only way to shift demand is through downgraders; buyers who are backing off from the overheated private property market, and opting for a new flat instead. But this siphons off very little of the demand.
4. Lack of Supply Due to MOP
The MOP (Minimum Occupancy Period) prevents HDB owners from selling their flat in the first five years. This was done to prevent speculation. Those flats are supposed to be for housing, not investment.
Unfortunately, a five year MOP slows the rate at which resale flats become available. The longer you have to wait to sell a flat, the fewer resale flats there are every year. This becomes a serious problem when, as we said in point 3, a specific demand exists for resale flat.
The number of people who need resale flats are not decreasing, but thanks to the MOP, the number of resale flats are. Thus, demand outstrips supply and causes prices to rise.
What Do We Do Now?
Obviously, now is a bad time to buy a resale flat.
There are still good deals to be had, but do compare the COV to surrounding properties. If a particular unit’s COV exceeds its neighbours by more than 20%, I suggest you back off and find something else in the same area. High COV = Low capital gains.
Otherwise, gee, thanks for contributing some more price inflation.
If you absolutely must get a resale flat, you’d better get choosy about the bank loan. It’s the one thing you can control. Visit loan comparison sites like SmartLoans.sg, and hunt for the best option.
You can also follow us on Facebook, and we’ll update you on any major changes.
Are you stuck with needing a resale flat? Comment and let us know!
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