This is the first sign that residential properties are finally falling. Core Central Region properties fell by 10.2% in Han from 4Q11. But even more compelling is the rental yields of Outer Central Region properties have started to fall. When rental yields fall, usually prices will follow. The reason is many buyers rely on rental income to offset mortgage payments and when income is insufficient, some buyers may be willing to sell at lower prices. It may not be the majority of owners, but the peripheral groups.
I am also of the opinion that contrary to popular belief, prices of outside central regions and non central regions may fall greater than the CCR. This is because of the deluge of supply from government land sales that come from the OCR and NCR. The abundance of studio units in OCR and NCR was senseless because only expats and young professionals are willing to live in studios that are near their work places. For OCR and NCR areas, it's best that buyers go for one to two-bedroom homes. That's where rental yields are the best because developers sold the one to two-bedroom homes at lower PSF. But the unsophisticated buyers, mainly HDB upgraders, bought studio units at sky high PSF prices, sometimes at a 50% premium to larger units. For example, a leasehold studio unit of 500 sf in a project in Sengkang could fetch S$1,400 psf, which is ridiculous considering old condos in central areas just next to Raffles Place are sold for less than that. Within the same project in Sengkang, a 3-bedroom unit at 1,200 sf could fetch only S$1,000 psf. Of course, the HDB upgrader who's eager to own that dream piece of private property will opt for the studio unit because the quantum is much lower at only S$700,000. If it's the upgrader's first private property or first loan, he needs to pay only S$35,000 of cash and S$105,000 in CPF. However, the rental is likely to be only S$2,000 in such a far flung area because the rental market only caters for singles, not families nor couples. Sometimes, even single expats may choose to live in a bigger apartment and share with a friend due to the lonliness. I lived in a large apartment for 4 years and I felt so lonely that I sublet a room for 2 of the 4 years. The gross rental yield will therefore be 3.4%.
A 3-bedroom apartment may cost S$1.2 million. A buyer would have to fork out S$60,000 of cash and S$180,000 of CPF. Not many buyers have S$180,000 in CPF. But the rental could be S$4,500 because the two common rooms are worth S$1,250 per month while the master bedroom S$2,000 per month. If a tenant takes the whole house, S$4,500 per month is reasonable. This translates into a gross yield of 4.5%.
When interest rates finally rise in 2014, perhaps things get worse for the studio unit owner. A loan of S$560,000 over a 30-year tenor will require around 1,400 of principle per month. Interest if at 1% will only be $467 per month. The total debt burden will only be $1,867 per month. The rental income of $2,000 has to be net of maintenance of around $200, which works out to $1,800. This is barely enough to cover the mortgage and the buyer needs to cough out $67 per month to pay for the property. What if interest rates rises to 4% as they did in 2007, 1999, 1997? Let's not talk about the worst case scenario, but assume that interest gradually trend up to 2.5% by end 2014. The interest burden will rise to $1,167. Including principle payments, the mortgage will be $2,567. Perhaps you can argue that when interest rates rise, the economy is usually over heating and hence rental income will increase. Let's assume a 10% increase in rental in 2014. $2,200 of gross rental or $2,000 of net rental leaves a $567 gap on the pockets of the owner. You will lose $567 every month just to earn that "air space".
Consider the 3-bedder. A $960,000 loan will incur interest cost of $2,000 per month at 2.5%. Principle payment is $2,400. Total mortgage is $4,400. Let's assume rental also rose by 10%. $4,950 is the gross rental. After deducting for a bigger maintenance fee of $300, the net rental is $4,650. The owner is still generating positive cashflow of $250.
Another point to note is this: isn't it ridiculous that a condo in Jurong or Punggol can fetch $1,400 psf?? I know it's new, but it's leasehold and say what you like, it is at least 30 - 45 minutes away from the city. If you work in Tampines, Changi or Jurong, travelling time may be only 15 - 20 minutes by MRT. But then the rental market is only the IT white collar workers, nurses or HR managers who work in the non CBD areas. Condos in the central region, which are also leasehold but older, are fetching around $1,400 psf and have en bloc potential what more!
The reason that OCR and NCR properties have surpassed CCR properties is that most of the recent completions (in fact around 50 - 60%) are in the CCR. there is a temporary overhang of CCR properties. The ABSD further dampened demand. However, from 2010, most of the GLS were in the OCR and NCR regions. The flood of supply will be completed from 2012/13 onwards. It may be time for OCR and NCR properties to correct sharply and for CCR to rise again. CCR properties should fetch a 20 - 40% premium to OCR properties due to proximity to the city.
Another point is that HDB completions will hit 20,000 - 25,000 from 2013 onwards, peaking in 2014/15. HDB prices, which experienced unprecedented rise from 2003, will finally correct 10 - 30%. The reason HDB prices kept going up in the last 9 years was due to no magic; it was the under supply. But the overhand will finally come and we will see the return of the downtrend like in 1997 and 2000. falling HDB prices will definitely affect mass market condos. 2013/14 is the year to watch.
I believe that there will be a gradual fall in property prices here in 2012, starting from CCR residential, then followed by NCR and OCR at a greater magnitute in 2013. Then industrial, followed by office and lastly retail prices will follow suit. Prices may hit a trough in 2014 / 15... it's very hazy to foresee so far ahead, but it's likely that the slide is a long but gradual one.
CCR home prices fall very harshly
Feb 10, 2012 - PropertyGuru.com.sg
