Red Hot Market or Red Hot Bubble?

After some pondering, wandering and looking out at the Singapore property market, it is really difficult to decide whether buying a public housing or private property will be a better choice. The market is so hot that it is beyond what sane investors would call sustainable. Of course, I am hoping that the still expanding property bubble will burst so that I can re-enter the market and get my dream home at a reasonable price. But a recent string of poor economic figures churn out by Singapore and a recent rumors of instability at work place served as a wake-up call for me. I need to be buying a property that I can afford even with a single income. It is within our means to buy into a private property during this red hot market with both our current income.

The 2,023 Square Feet Pasir Ris Sky Terrace Maisonette built by HDB. Will you pay SGD$900,000 for one?

Or will you pay SGD$1.3 million for a 1,300 Square Feet private condominium in the same town?

But enter a scenario that one of us ceases to work and that would mean servicing the long term loan for a private property will be hazardous.  For your info, a resale 120+ square meter (1300 Square Feet), 99 year leasehold (or freehold in some isolated areas) 3 or 4 bedroom unit would easily cost us between SGD$950,000 to SGD$1.3million, depending on the type and location of private property you are getting. The unique public housing in Singapore where more than 80% of the Singaporeans live in costs between SGD$550,000 to SGD$600,000 for a similarly sized unit with a 99 year leasehold. But such units near our current area where we stay will be 20 years old or even more. The question in buying an old public housing is what will be the worth of the public housing 30 years down the road. This is complicated by the bank practices in Singapore where getting a bank loan for a leasehold property is near impossible, if the number of years of lease left will be less than 40 years of lease after the buyer’s intended period of repayment.

For example, if I buy a 20 year old property now and stay in it for 30 years, the property will be 50 years old. There are 2 scenarios that will happen.

1. The property will either be allowed to stand despite its old age OR

2. The property will be re-purchased by the government for public housing or a private property developer for a private property via en-bloc exercises.

If it an en-bloc exercise do take place, the compensation value will be determined via the market rates which is good. However, if nobody en-blocs your property, you can only get rid of it via the normal sale route on the resale market. This is when the complications come in. How much will your 50 year old leasehold property be worth? Your next buyer will be constrained by the loan period that he can get as buying a 50 year old property will mean that the buyer can only loan up to a maximum of 10 years. Assuming the property prices remain unchanged 30 years down the road, this means that the buy will need to repay a high loan over a very short period of time. Such properties are definitely not going to go well with the market. Moreover, if I am the buyer, I will rather choose a younger property which is likely to give me less problems and lower renovation costs due to the lesser number of items requiring an overhaul.

Let’s first look at the public housing. Can we then depend on the government to en-bloc our old public homes? Based on the current government scheme, the HDB SERS scheme will provide a replacement flat for the affected owners around the same town and top it off with some compensation if the market value of the current property the government will be re-acquiring is higher than the new location. Sounds great until you think about the large number of public flats in Singapore that had crossed the 20 year old market. Some are even in their 30s! How in the world would the government be able to build replacement flats so that they are able to en-bloc the old flats? Chances are even slimmer when we take into consideration of the fact that the government resource are now fully tied up with crawling back on lost grounds to provide new housing to catchup with the huge deficit in public housing supply. This uncertainty adds a lot of risks into the current public housing resale market.

If we look at the private housing, would the private property developers en-bloc 99-year leasehold properties? Well, unless the location is good, the chances are slim. Looking at the data from Square Foot Research between 1995 to 2012, there are only a total of 11 private properties with 99-year leasehold tenures being en-bloc over a 17 year period! If we breakdown the data further, we see that 72% (8 private developments out of 11) of the en-blocs happened during 2006 and 2007 on the height of en-block fever. For the rest of the years, there is only 1 development being en-bloc in each of the year in 1999, 2005 and 2010. If we breakdown the data by Districts, only Districts 4, 6, 7, 9, 10, 15, 16, 19 and 23 had ever being en-bloc. Why is this so? A simple look at the Singapore land policy will explain this. All new government land parcel releases are only in 99-year leasehold tenure. As a developer, why would I want to en-bloc a 99-year leasehold at a premium and to top up the lease back to 99 years is an additional cost. Throw in the new rule that a 10% Additional Buyer Stamp Duty (ABSD) will be imposed if the redevelopment is not completed and fully sold by the end of 5 years, and you got your reason. Freehold and 999-year leaseholds are no longer available for public tender. Hence, they are limited and en-blocs will likely to target these land parcels.

I hear you say, perhaps, things will change 30 years down the road where land supplies will be limited. It is true that land supply will be more limited compared to today, but bear in mind that there will also be a supply of properties which had passed their 60 year old age limit of worth which will be good targets of en-bloc for a much lower value than when the owners bought them. Would the private property developers en-bloc your 50 year old development? If I were them, I would go for the 60+ year developments (if they are still standing) and acquire them at cut-price for a good margin.

The famous Bishan “Sky Terrace” HDB Maisonette Flats above that went for SGD$900,000 is big at 163 Square Meters (1,754 Square Feet) in size. But how much will they be worth 30 years down the road after you repaid your loan?

As you would know, all of the above analysis are systematic analysis and there are no existing data available for us to “predict” what would be the fate of our old housing, it adds to the uncertainty of the Singapore public and private property market and that delayed my hopes of acquiring my dream abode just a little longer. I simply can’t imagine the unbelievable million-dollar HDB Maisonettes that are more than 20 years old and the probability of these million dollars becoming worthless years down the road. We just have to adopt a wait and see approach.

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