Caution: Huge home supply
THREE weekends ago, eager buyers snapped up all of the 738 units (498 condo units and 240 Soho-inspired units) of the J Gateway condominium in the west within 24 hours.
The remarkable performance surprised market watchers, including many developers, because the last time a sizeable project was fully sold within such a short span of time was in 2009, with Optima@Tanah Merah.
One question that figures is: "Why are people still buying when prices are at a record high?"
This is especially true for new launches. Our research shows that in the first five months of the year, developers sold a total of 8,247 homes, with a 100 per cent overall take-up rate (developers launched 8,229 units during the same period).
Including executive condominiums, the sales would have been 9,601, a 111 per cent take-up rate. In other words, all the units that developers launched this year have been absorbed by the market.
In contrast, resale volume in the first five months of this year was only about 40 per cent of new sales. Home owners managed to sell only 3,430 units, according to the Urban Redevelopment Authority's Realis caveats data.
One key reason that more buyers have been swayed towards the purchase of uncompleted homes has to be the imposition of the seller's stamp duty. Anyone who sells his property within four years will be penalised with a stamp duty of up to 16 per cent of the value of the property.
The investment rationale of such buyers is that they need only to fund the purchase progressively while market prices continue to climb. When the project is completed, they would have fulfilled the holding period and avoided the seller's stamp duty.
Even though new launches look promising, they do not necessarily rake up the highest capital appreciation, going by our research data.
In the first half of the year, prices of resale homes outperformed those of new homes in all three market segments over the same period last year.
Based on caveats data, the median price of mass-market new homes in the Outside Central Region (OCR) rose by 7 per cent to $1,110 psf, from $1,040 psf a year ago. In contrast, the median price of OCR resale homes increased by 12 per cent to $978 psf, from $871 psf a year ago.
In the mid-tier segment, resale prices in the Rest of Central Region (RCR) rose even more over the past year. The median price of RCR resale homes increased by 15 per cent to $1,260 psf over the same period a year ago, more than the 9 per cent increase in new-home prices.
In the luxury segment, it was also the same story. Resale prices in the Core Central Region (CCR) rose by 8 per cent but, in the new-sales market, prices went down by 26 per cent year-on-year. The drop could be because of fewer new launches by developers in the CCR in the midst of uncertainties over global economic recovery.
Interestingly, despite the higher-dollar-per-square-foot price of new homes, home buyers forked out less money for new homes due to their smaller quantum. This is very apparent in the mass-market segment.
Data shows that the total median quantum of new homes stood at $929,000 in the first half of the year, 22 per cent lower than the $1.19 million of resale homes.
This is largely due to the shrinking of apartment sizes. If we look at OCR homes, the median size of new homes is 28 per cent smaller than that of resale homes. In the RCR segment, the difference in median sizes between new and resale homes is a staggering 37 per cent. The only exception is the CCR segment, in which new homes are actually larger than resale homes.
From the figures above, we can tell where the investment demand comes from. The city fringe seems to be the hottest area, followed by the suburbs, while investment demand in the city centre has cooled.
The crucial question now is whether these seemingly hot investments can eventually translate into real gains for investors.
Unfortunately, the odds are against the investors. Between this year and 2017, an average of about 18,000 private housing units will be delivered to the market annually.
(This is higher than the 10-year historical average, which stands at nearly 9,000 units every year.)
Out of these units, 54 per cent will be delivered in OCR, while 21 per cent and 24 per cent will be delivered in CCR and RCR, respectively.
Unless real demand from future tenants can support this huge wave of supply going forward, property investors should exercise caution when taking the plunge.
The writer is the head of research and consultancy at property firm OrangeTee.