To buy or not to buy, that is the question

I think I had a similar title on my FB post recently about housing issues. To buy or not to buy, given the current economic situation. After weighing the pros and cons, we decided to buy and we are done with the Option to Purchase. Yay!

I’m attaching the news article which resonated with us. We have also considered the points listed by the reporter. Maybe this is another confirmation that we should buy?

In any case, our minds are set.

To buy or not to buy, that is the question. 
Article in The Sunday Times, 21 August 2011.

Home buyers, both occupiers and investors, have been scratching their heads more than usual lately on the vexing question of when to enter the market.

Even leaving aside the current global stock market and economic turmoil, it is a perplexing picture.

Will private home prices keep inching upwards, as they have done persistently even after the various market cooling measures brought in by the Government?

Or will the warnings of an oversupply of new homes, coming from certain quarters, prove to be accurate and lead to a sharp slide in prices?

Trying to evaluate the outlook for the local property market has been made even more baffling as a result of policy shifts on public housing, which have been thrown into the mix recently.

Prime Minister Lee Hsien Loong announced during his National Day Rally speech last week that the income ceiling for new build-to-order (BTO) HDB flats will be raised from $8,000 to $10,000, while that for executive condos (ECs) will go up from $10,000 to $12,000.

As a result, an additional 99,161 households will be eligible for BTO flats and an estimated 68,700 additional households for ECs, UOB Kay Hian property analyst Vikrant Pandey has calculated.

The pace of building will also be ramped up sharply, with 25,000 BTO flats to be launched both this year and next – an unprecedented 50,000 new HDB flats in total in just two years.

These changes in the public housing sphere are set to send ripples through the closely linked private market, shrinking the private demand pie especially for suburban mass market homes as middle-income buyers relook their choices.

Dr Chua Yang Liang, head of research at Jones Lang LaSalle South-east Asia, estimates a possible 5 per cent to 15 per cent decline in annual demand for new private housing, translating to 700 to 2,000 units.

This is provided public housing supply keeps pace with the increased demand by this group of new eligible buyers, he said.

The Government has also released a bumper supply of state land – largely in suburban areas – to try to stem rocketing prices in the private market.

This has led to concern about an oversupply in the next few years as the potential inventory builds up.

Coupled with a tighter immigration policy, demand could further slow.

This has sparked growing talk that suburban home demand will soften as prices head for a correction. This might cause home owners chagrin, but home hunters would welcome such a price slide.

More cooling measures unlikely

Some home buyers might be hoping for a fifth round of government measures – after the latest in January – to further cool the market and bring prices down.

However, experts say that this is unlikely for now, with the combination of growing macroeconomic uncertainties and the shadow of an oversupply of homes in the primary market.

Private home prices have also been moderating for seven consecutive quarters, inching up just 2 per cent in the recent April to June quarter.

In addition, land prices have come down at some recent government land sales tenders, indicating that the once bullish sentiment has become more subdued – although competition for good sites is still keen.

An RBS report by analysts Fera Wirawan and Bryan Lim said the measures to cool home prices seem to be concentrated on the HDB market. They also see lower policy risks now – in terms of a fresh round of cooling measures for private homes – in view of current global economic uncertainty.

‘In addition, potential measures to stem speculative demand in the private home market could have limited impact, given the highly punitive policy introduced earlier (in January),’ the report noted.

Where are prices headed?

Experts differ on where they see prices headed, with some predicting firm home prices in the light of low interest rates for the next two years and the strong holding power of developers and households.

Location also comes into play, with choicer sites – especially those close to MRT stations or transport nodes – expected to hold up better in the event of softening demand.

Those who expect prices to fall mostly see it happening in 2013 and 2014, as the construction of many suburban projects reaches completion.

Prices for the rest of this year are likely to hold firm, said Mr Joseph Tan, CB Richard Ellis (CBRE) executive director of residential.

But experts admit that the market outlook has been clouded by the global market volatility, the European sovereign debt crisis and risks of another global recession, with the United States economic recovery stalling.

How these events pan out in the next few months will have an impact on the take-up of new launches and where prices are headed, they predicted.

Goldman Sachs analyst Paul Lian said in a report released this month that he leans towards an oversupply of housing in 2013 to 2014 but is mindful of arguments made to the contrary.

‘At the very least, the quantum shift from undersupply to either balanced or oversupply is sufficient to take the edge off home prices,’ he noted. He expects prices to moderate by 15 per cent over the next 18 to 24 months.

SLP International research head Nicholas Mak sees a more than 50 per cent chance of a correction in the next three years. Whether this will be a short blip or sharp drop, however, depends on how the macroeconomic situation plays out.

RBS’ analysts, however, expect mass market homes to be in short supply till 2014 due to the population jump in the past five years and the lower-than-average home completions in the past decade.

The population rise over the past five years averaged 3.5 per cent a year compared to the 1.9 per cent a year growth from 1996 to 2005, they noted, driven by an increase in the number of non-Singaporeans.

‘Work permit holders who earn less than $1,800 per month accounted for the largest group of non-Singaporean citizens. This had heightened demand for mass residential homes and the segment would continue to be undersupplied until 2014,’ the report added.

When and what to buy?

This has thrown up the question of when buyers should make their move, in the light of the various factors and uncertainties in the market.

While home buyers often try to time the market, experts say that this is very difficult.

Affordability should be the key consideration instead.

Buyers also have to consider their motivations for purchase – budget, urgency of need and availability of what they like, for example – and the type of product they are looking for.

 

    • Resale home or new launch

 

PropNex chief executive Mohamed Ismail advised home buyers to broaden their search beyond just new projects to resale properties as well, as such projects can be cheaper.

There are some older freehold or 999-year leasehold projects in the Hillview estate or Flora Road in Pasir Ris, for example, whose per sq ft prices are about 20 per cent cheaper than new 99-year leasehold launches, he noted.

‘In both instances, look for homes that offer potential for further upside, such as the Jurong area which the Government has a masterplan for, or possibly Paya Lebar which has also been earmarked to be a commercial centre outside of the city,’ he said.

Mr Tan Kok Keong, OrangeTee’s head of research and consultancy, also said that buyers should be more cautious in purchasing new homes with benchmark prices as the downside risk for such units is greater during a downturn.

 

    • Investment or owner occupation

 

If buyers are looking for an investment, they can afford to be more selective and possibly wait it out. But they also need to be disciplined with their initial strategy, SLP’s Mr Mak said.

For example, once prices fall by their targeted 5 per cent, buyers should enter the market immediately rather than try to catch the bottom.

‘If not, you might just miss the boat because this might be a V-shaped recovery like the last time… But people are usually scared to enter the market when it’s down,’ he added.

In 2009, the market rebounded within a few months, with sales and prices of new private homes picking up significantly from April – a turnaround from the first quarter that year when sellers were cutting prices just to offload their homes.

However, if buyers are looking for a home to live in for the longer term, pricing becomes less of a factor to consider.

Instead, other factors such as the project’s location and its surrounding amenities such as good schools that fit into a buyer’s lifestyle and needs should be considered as well.

‘Owner-occupiers should not be too disturbed by the volatility – the ups and downs of home prices in the medium term – since they are prepared to keep the property for five years or more. By then, the economic landscape in Singapore and the global front may have improved,’ CBRE’s Mr Tan said.

Investors, on the other hand, should bear in mind the imposition of the sellers’ stamp duty within the first four years of purchase.

Interest rates, while low now, need to be factored into the equation.

‘Home buyers should take up a mortgage which they can service comfortably without over-stretching their financial resources, bearing in mind that interest rates may go up from 2012.

‘Choose a property that is within easy reach of the MRT and in a neighbourhood that is easily accessible to amenities such as shopping malls, markets, foodcourts, schools. These properties are likely to cost more but they will be able to hold their values better,’ Mr Tan said.

 

    • ECs or mass market homes

 

Those in the middle-income group – the so-called ‘sandwich class’ with a household income of $8,000 to $12,000 – will now have more choices for homes with the income ceiling being raised.

PropNex’s Mr Ismail, however, noted that ECs should be priced about 20 per cent to 25 per cent lower than comparable mass market homes to make up for the sale restrictions. If not, they are not a worthwhile buy, he said.

ECs, like other HDB flats, are subject to a minimum occupation period of five years. After that, they can be sold only to Singaporeans and permanent residents. They become private property after 10 years, and can then be sold to foreigners. A home buyer who is eligible to buy an EC, should take advantage of the opportunity, CBRE’s Mr Tan said.

After all, an EC will be partly privatised after five years of occupation and it will have the potential to enjoy price appreciation to the level of private homes in the neighbourhood, he added.

However, the owner has to be mindful that he has to keep the EC for seven to eight years – including its construction period and a five-year mandatory occupation period. Owners of private homes, in comparison, need only to hold the unit for four years if they want to avoid paying the sellers’ stamp duty.

 

    • Ensuring affordability

 

Affordability was the one thread that all experts emphasised as being critical in any purchase decision.

Industry players say this typically means that a household uses less than 40 per cent of its disposable income to service its monthly mortgage.

‘Make sure that the remaining 60 per cent is enough for your other commitments and you’re not overly stretched… Even in the case that interest rates rise, you can still finance the mortgage,’ Propnex’s Mr Ismail advised.

OrangeTee’s Mr Tan added that buyers should also factor in other potential stresses before buying a home.

‘If you lose your job for three to six months, would your savings and CPF funds still be enough for you to cover the mortgage?’ he asked.

While potential buyers often hope for prices to fall, this typically happens when the economy is not doing well and when their job is less secure – which, ironically, makes it harder for them to commit to a big-ticket purchase, Mr Tan noted.

On the sidelines of a recent Real Estate Developers’ Association of Singapore event, Frasers Centrepoint group chief executive Lim Ee Seng also advised young people buying property for the first time not to try to time the market, and to take a long-term perspective instead.

‘It’s very hard for you to time the market. Even people like us don’t know exactly when the property market is going to go up or come down.

‘The most important thing is you must be able to afford it. If you can, and the price is within your range, the location is what you want, it is your first house and you’re going to stay there long-term – maybe 20 to 30 years – you just go ahead and buy,’ he added. This is because in the past 30 years, despite the ups and downs in real estate prices, there has still been a 10 per cent compounded price growth a year, he noted.

Developers at the event noted that it is more important for buyers to be realistic, not to overstretch themselves or to see property as a speculative investment.

‘If you can afford only a Japanese car, don’t go and buy a Mercedes,’ Mr Lim advised.

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