A few months ago, I predicted that flat sellers would flinch first, and resale prices would plummet. Or maybe it was some guy I interviewed in that article, and I’m just taking credit. “You can’t do that!” Why not? I buy them lunch. Which is going to be a lot more than some property agents can afford, at the rate sales are going:
The Big Smoking Crater That is the Resale Market
In 2011, resale buyers in most districts would expect to pay Cash Over Valuation (COV) of around $30,000 – $50,000. In some cases (the “million dollar flats”), COVs went as high as $90,000+.
But as of Q3 this year, median COV prices were only $17,000 – $18,000. And as of last month, about 10% of resale flats were sold at zero COV. It’s not often that a property segment crashes faster than a Windows update.
Besides falling prices, the volume of sales is also declining. There were 5,235 transactions in Q2, but just 4,529 in Q3 (approx. 13% drop). Compared to the same period last year, that’s a 27% drop in total sales volumes.
The question now is, has the resale market hit rock bottom?
The General Consensus
Can resale prices keep falling? Among the investors I spoke to, the general sentiment is “Yes, but…”
Albert An, who has since moved his investments into Malaysian property, is certain that:
“I think by mid 2014, we will see not only zero COV transactions, but even transactions that are below valuation. The current fall is the tip of the iceberg. Overall I think it’s a good move by the authorities: there is no harm to owner-occupiers, and investors have sufficient warning to switch to other assets.
It is a clear signal from the government that, while flats can be assets, they will not be so at the cost of long term affordability.”
However, Albert adds that there’s one unforeseen factor:
“Not many people are factoring in the holding power that sellers have. The sales volume is falling because many sellers can afford to take their flats off the market, and wait out the down period.
If enough of them do it, it can cause a supply issue among the population segments that still need resale flats. That can cause prices to rise again.”
That aside, predictions of further drops are based on:
- Larger Down Payments
- Availability of Flats for Singles
- Restrictions on Permanent Residents
- Bank Loans and Quantitative Easing
1. Larger Down Payments
Due to the new TDSR framework, buying property now requires bigger down payments.
“Most property investors have an outstanding loan,” Charlie Sng says, “so we will be paying 40% down payment, or 60%. Because of the big capital outlays, it prevents investors from immediately flooding the market and pushing the prices up again.
And in my experience, those investors who can shrug and say ‘40% down no problem’ are not the ones who are interested in resale flats. They can afford investment options like private condos.”
2. Availability of Flats for Singles
HDB has recently started selling two-room flats to singles; and there’s an ongoing commitment to keep doing so. But singles were a big source of demand for resale flats:
“A lot of people who wanted resale flats were singles,” Albert says, “People who couldn’t get married, recent divorcees, single parents. They were forced to accept high COVs because they needed a roof over their head, not because they actually wanted to buy resale.
So now HDB has provided them with a more affordable option, and you can see they’re going for it. At the last ballot there were 58 singles bidding for one flat. As the available flats for them grows, it will siphon off demand in the resale market.”
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3. Restrictions on Permanent Residents
PRs must now wait three years to buy a resale flat. A bit of clarification here:
Let’s say you’re a PR, and your wife has worked here for four years. You just got off the plane last week. Can you buy a resale flat?
If you want want one, your wife has to be the sole borrower, and the loan is based on her income alone. In effect, the demand from PRs hasn’t disappeared; but it has jammed the brakes, pulled up the handbrake, and chucked an anchor out the window for good measure.
“Stalling them for three years ensures that demand is less likely to overrun supply,” Albert says, “At any rate, this is one reason so many sellers are taking their flat off the market. If COV is so low, they may as well rent it to PRs who will shortly need it, rather than sell at a bad time.”
4. Bank Loans and Quantitative Easing
Quantitative Easing (QE) is an American policy of buying back bonds, and flooding the market with liquidity. If the Americans taper QE as they’ve threatened to, home loan interest rates may rise.
However, Albert claims that “the fears are overblown if you are not an investor. If you are taking a HDB loan, none of this matters as the interest rate is fixed. If you are taking a bank loan, you know that the interest rate spike will not make your house unaffordable*.
The only worry is to investors, not home owners. But as I’ve said, we (he means investors – Ed.) have fair warning by now to look at other assets. We know resale flat prices are going for a plunge in the short term.
It’s less about loans, and more about available buyers. Right up to 2014, we can expect that resale buyers will mainly just be upgraders, which is quite a small pool. Supply will outstrip demand for now, and the most probable consequences are even lower prices.”
(*When you apply for a loan, banks measure your ability to repay based on an interest rate of 3.5%. This is regardless of the actual current rate, which is a much lower at about 1.7%.)
For advice on the lowest home loan interest rates, check out sites like MoneySmart.
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