Short Housing Conclusions May 2017

Since my previous post, I have been ravenously reading up about property – more so than my usual latent interest.

One of my more detailed previous posts that I re-read was a long one about BNP’s property research report. Since 2015 wasn’t over since the report was published and we are already in 2017 now, I found the relevant 2015 and 2016 numbers and plugged it into the model. Unsurprisingly, at least on the demographics side, it is leaning towards the bear case scenario, in which property prices only bottom between 2018-2020. Of course, this isn’t an exact science and their model could be wrong, especially since I didn’t use every aspect of it.

Demographics point towards a very marginal increase in foreigner population (2-2.5%), which is markedly lower compared to previous periods.

Supply looks just slightly larger than expected, which is of course negative for prices overall.

HDB’s recent ruling changes to grants and eligibility also includes more and I would argue is very attractive in luring first-time buyers away from the private property market. As a government policy, it makes sense though.

How much of an impact these factors make is hard to calculate, but they are quite price negative with regards to the private property market.

The hard data which comes from URA, fresh off the press on 28th Apr, only has a positive of vacancy rate dropping from 8.4% to 8.1%.  Since the peak of 2Q16, vacancy rates from 8.9% has been dropping each quarter until the latest figure. However, it should be duly noted that vacancy rates have never broke past 10% in recent times even during crisis (like past 20 years), so levels above 8% are still considered high, with the average looking to be between 6-7% during normal periods and 5% during hot times. Long story short, the decrease in vacancy rates is positive for price, but these levels are still not good and nothing is stopping it from stagnating at these elevated levels, or deteriorate in the coming quarters.

Of course, we can talk about this and that, but all these indicators are just derivatives so that we can gauge price. That said, price is the ultimate indicator, isn’t it?

The PPI shows the PPI has yet again declined. From its peak in 3Q2013 at 154.6, the index now stands at 136.7, which is a 11.6% drawdown. The rental index is also a similar figure.

However, the SRX research shows something slightly different, which is that property index that they use has risen since Nov 2016. I have no idea how they came up with that statistic, but that’s only a 5% drop from the peak in 2013. Doesn’t look realistic to me, but I thought I’d mention it since I did come across it.

Being one of the more prominent sites talking about property, Mr Propwise’s outlook is a must-read. One of the things which is often forgotten is how rentals affect the prices of property, which Mr Propwise kindly reminded people in his post.

The thing is that rentals lag a bit because of the contract period, so it’s not a very instant indicator, but plenty of properties are clearly exhibiting the trend of rental renewals dropping in the recent months.

Here’s an example of a property which I think exhibit this phenomenon rather well. This condo is quite well known for having lots of expats (hence, decent volumes of rental transactions). As you can see, until February 2016, rentals have always been $3000 or higher. The rest of 2016 saw rentals half above and half below the $3000 line. However, it is clearly noticeable that in 2017, rentals are being renewed mostly under $3000.

Rentals have dropped from being in the $3400 range, down to about $2900. That’s a drop of 15% of rental revenue!

Landlords would know why this is a problem. While the revenue has dropped, fixed costs like the condo maintenance and utilities remain constant. That means a 15% drop in rental revenue is more like a 20% drop in actual rental income! The larger the fixed costs, the more pronounced the effect of the rental drop.

Based off recent valuation, gross yields of that development have dropped from 3.7% to 3.1%. Count in net yields after paying off fixed expenses and rental taxes and I strongly doubt returns over 2.8%. Is that good yields given the investment quantum and the risks? Personally, I don’t think so.

As eager as I am to purchase a property, barely anything makes sense to me, especially with recent “premium” mass market units selling at $1800psf. I can barely grasp how some $1200psf developments make sense, that’s just beyond my comprehension.

I strongly doubt the notion that investing in properties now is a good time. Lucky for me, time is on my side. With most recent launches being bought for the purpose of investment, I am sure that further down the road when rent is either low or non-existent and buyers being few and far in between, I will be able to get a sick deal. Perhaps the last domino that has to fall must be from the property owner’s side. I feel there isn’t enough cost pressure to force them to release their grips and many are currently holding on thinking that the worst is over. I think that things will still continue to get worse, but I’m not sure if that would be bad enough to shake out enough of the market and cause a rout. Particular individual developments are routing, but it’s largely confined to recent mass market units, especially those marketed as investment properties and are just full of identical 1 and 2 bedroom units.

There have been quite a few launches recently and it makes it look like the property is making a comeback, but I would reckon it’s just a bounce and we continue to head lower.

I’m in no rush at all. It totally didn’t feel like a bottom. Maybe just Sentosa, ahaha.

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