Are landed property prices for real?

When the real estate figures for the private housing market for Q3 2010 were released in late October, the landed sector pulled off a huge surprise by going against the market trend.

Instead of slowing down like the rest of the market as it absorbed the impact of the most recent set of cooling measures, prices rose at an accelerated pace.

The rate of price increase for high-rise apartments and condominiums slowed from 5 per cent in Q2 to 1.6 per cent in Q3, while that of landed homes rose from 6.2 per cent in Q2 to 7.7 per cent in Q3.

The usual reasons were trotted out. The supply remains limited while buyers of landed homes are not hindered by affordability concerns and are therefore better able to cope with price increases.

Personally, I think this is a common marketing ploy of real estate agents to get buyers to pay higher prices. Anyone who has been following the market for many years will know that prices of all properties, when faced with the same set of measures or regulations, will behave in the same way – meaning, they follow the same trend, if not the magnitude, of the impact.

Since the release of the Q3 statistics, there have been a lot more news reports and articles than usual extolling the appeal of landed homes, especially good class bungalows (GCB). Limited supply is the most common reason given to support the strong growth potential of GCBs.

But given the high cost of GCBs, how big really is the market for such properties? Buying one is already such a big commitment; maintaining it thereafter is another. The demand for such properties is inelastic. Whether prices rise or fall, real owner-occupier demand remains more or less the same. How often do we hear of tycoons and CEOs owning and living in two or even three GCBs at the same time?

All this means that the surge in demand must come mainly from investors. Rapid price growth in this segment can come about only when investors sell to other investors.

This brings me to the other commonly cited factor: Affordability. For owner-occupiers, this is not likely to be a concern. For investors, who tend to fully leverage their cash resources, affordability is definitely a concern, especially if they already have a number of properties on their hands. They carefully weigh the risks against the potential capital gain before investing.

Is landed property among the safest buys? For one, when prices of this segment shoot up too rapidly, it is difficult to get valuations to match the purchase price. A large proportion may then have to be paid in cash.

As real demand is inelastic, what happens to the last investor holding the property? Yes, you’ve guessed it – he walks away from the deal with a substantial loss.

It was therefore not a real surprise that the buyer of the $36 million bungalow in Sentosa Cove walked away from the deal. I hear another similar over-the-top purchase on the island met with the same fate. My sources tell me there are also similar aborted deals on the main island. I personally know of one case.

All these aborted deals leave me wondering whether the caveats filed for these purchases have added more spice than usual to the price index for landed homes. It will certainly explain the Q3 anomaly.

The same reasoning can be applied to semi-detached and terrace houses. However, here, the budgets of owner occupiers are constrained by their wealth and household incomes.

You will know when this segment becomes highly speculative. It is when the dirty tricks come out. There is big money to be made and fair play is the least concern of many housing agents.

The complaints have been piling up and I am hearing of many of them. I expect the newly-formed Council for Estate Agencies (CEA) to be really busy.

Finally, the flash estimates for 4Q 2010 have indicated that price growth of private homes has slowed to reasonable levels. Most of us have been wondering whether another set of cooling measures is imminent. If rapid growth is the main concern of the authorities, I do not expect another set any time soon.

By Colin Tan, Head, Research & Consultancy at Chesterton Suntec International.

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