The latest buyers' stamp duties surprised all. Many touted it as the final nail in the coffin of residential properties. Immediately, agents, so-called property commentators who wrote books like "Real Estate Riches", developers and speculators poured scorn over the measures. They all have their agenda.
Agents:
If you think sell-side analysts cannot be trusted and are overly bullish, property agents are the worst of the lot. I've met more than my fair share of agents who have very little knowledge and will tell you anything just to make a sale. With the latest measures, if prices don't drop, transaction volumes surely will.
Developers:
They cried wolf that the government's measures should have targeted foreign developers. They claim that foreign developers bid up land prices and compete against local ones. This is akin to begging the government for protectionism. Why can't foreign developers compete against local developers? If competition increases, standards might increase. What the developers are unhappy about is that it diminishes their already fat margins.
Mind you, property development has made many rich. If they buy land at 900 psf ppr, construction cost is around 250 psf ppr, their breakeven price is around 1150 psf ppr. They sell it at 1300 psf. You might think their margins are very thin, earning something like 150 psf or 13%. But you must know that developers borrow to the hilt. They could borrow as much as 80% or put down as little as 230 psf. So 150 of profit against 230 means an ROE of 65%! Their cash flow is further improved by launching the units way before any construction starts. Often, they collect back their downpayment on the land within several months of the purchase of the land!
Then the other part of the scandal is the "creative" marketing by the developers. The balconies are as much as 10 - 15% of the property, which they did not pay for when they purchased the land. The bay windows, air con vent may account for another 10 - 15% of the property. So altogether, if you think they only sell you at 1300 psf, they could effectively sell you at 1690 psf if you count the "livable" area. This represents a margin of 235%! a profit of 540 psf on an investment of 230! If you ask agents what is the effective, livable space, most wouldn't know. But in developed countries, such information is transparent.
Foreigners
Why do they want to park their money here? I cannot explain the precise reason but one can only guess! If they are allowed to buy any property unchecked, prices will shoot through the roof. What happens when the party ends? Will we end up like Macau or like HK where prices rise and fall like yo-yos? Many fortunes may be lost and found with volatility caused by foreigners. I am afraid that those who lose their fortunes are likely to be the unknowing Singaporeans who live in one home and have their bulk of their wealth locked into one property. Those who profit will be the smartest Singaporeans and foreigners. The rich will get richer, the poor just become beggars.
Why the Policies By Government Were Correct
1. Affordability Index Almost at 2007 Levels
In 2007, mortgages accounted for 38% of Singaporeans' average household income. Then, mortgage rates were 4%. Today, mortgage rates are 1/4 of it, around 1%. Yet affordability is at 35%. What if interest rates start to normalise starting from 2013? We will fall into hard times again. It is this data that tells the government that property prices are a ticking time bomb that will plunge many Singaporeans into hardship as early as 2 years later.
2. Rental Yields Have Fallen to 2007 Levels
As a rule, buy when rental yield rises beyond 4.5%, sell when it falls below 3%. Rental yield is an indication of whether prices have risen beyond economic sense. It is a valuation indicator. Today's rental yield is around 3%, indicating that prices have risen too fast.
3. Increasing Number of Shoeboxes in Outskirts
I seriously cannot believe in the gullibility of Singaporeans who buy shoebox units in outskirts. I believe shoeboxes of between 400 - 700 sq ft is liveable in central regions because people like to live where they work. You can save quite a bit of costs doing that because you hardly drive, you save time by travelling less. I have been living within walking distance from my work place for the last 2.5 years and I love it.
But I have lived in houses as small as 700 sq ft before and I must tell you it's bad for your emotional health. I had to throw away a lot of my furniture when I moved in. The living room was so tiny that I couldn't put my favourite sofa in. When I moved into my present apartment at Clark Quay, which is 1012 sq ft of pure space (NO BALCONY, NO BAY WINDOWS), I felt so relaxed. I could fit in a piano, some gym equipment etc. It felt like home. I told myself that the next house must be over 1200 sq ft.
So I don't understand why anyone would want to pay money to live in a shoebox in Balestier or St Michael when the same amount could get you a nice HDB flat that's 1200 sq ft, fully air conditioned. Do you really need the gym, swimming pool or squash court? I hardly use the pool. I run around my area. It's really over rated living in a condo just for the facilities.
Developers love it because they could increase the psf price by as much as 50% for a shoe box. Gullible Singaporeans buy it because the total quantum is below 1m. So silly. One day the shoeboxes will be empty and people will be dumping it like rats infested plagues.
Curbing Speculation in Commercial Property Next
I strongly urge the government to curb speculation activities in commercial properties next. Rental yields have already fallen from 7-8% in 2009 to 3-4%. It is a bubble. If Singapore does go into a recession, many of the tenants will default. Already, many F&B, retail businesses are laboring under the burden of high rentals. it adds a lot to the cost of doing business.
Already, many of the buyers of commercial properties are in for not just speculative activities, but to store their cash. The government needs to tighten checks on the purpose of such transactions. If commercial property bubble bursts, we it could affect local banks because the LTV given can be up to 80%. Some of our local banks have been the most aggressive in lending to commercial property buyers.
Stock Market Going Down for a Week
Most people are optimistic creatures. Or their jobs require them to be optimistic. Like property agents, most dealers are bullish too. Their clients don't know how to short, or are averse to shorting. So they need to constantly talk up stocks. Look at the chart below of STI. Lower high, lower lows. It's time for another correction.
Credit spreads are at 460 bps. TED spreads around 55bps (2010 was 15 bps). 3month US LIBOR - OIS at 44bps (2010 was 20 bps). Things are not quite right and I believe it will get worse in 2012 before it gets better. The European situation is very long drawn, mind you.
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