Focus on the fundamentals

It has been almost two months since the Government introduced its most recent set of property market cooling measures. Market sentiment has been dampened but buying interest remains rather resilient, underlined by the healthy take-up at various new launches in recent weeks.

According to data provided by the research team at propertyguru, the number of visitor sessions to the real estate website increased by 15 per cent in January from the previous month, which is a contrast to the fall in search activity following the previous three rounds of market cooling measures.

This also corroborates the feedback I have received from our agents that there is still a large number of buyers even with the market at a stalemate.

Buyers have become more resistant to price increases while sellers remain optimistic on pricing, especially in the secondary market.

Market reports have recently swayed towards whether these buyers are long-term investors or speculators or genuine home buyers.

This is an area which readers should pay less attention to when contemplating to buy a property.

I have mostly refused to make this distinction, the key reason being that I do not have good evidence to support a conclusive statement. I am also not too sure whether buyers are clear on their intent or holding period, except to make money.

This problem is particularly acute when assessing buyers’ response to new launches.

A proper way of doing this is to conduct a stratified survey with the buyers or spend a few days at the show flat to observe and speak to a good sample of prospective buyers and salespersons.

Last year, I spent three entire weekends at the launch of the Waterview speaking to agents and buyers but at best, I could only give a guesstimate.

To illustrate the case of how inaccurate such assessment could be, let us take a look at Alexis at Alexandra Road.

Alexis comprises mainly shoebox units and was widely seen to be a speculators’ project when it was first launched and sold out in 2009.

In total, only 57 units out of 293 units, or 16 per cent, have been resold despite the almost 50 per cent increase in average prices since its launch.

So should these buyers who have held the property for almost two years be considered investors?

Or should they be considered long term speculators?

Anyway, if a person adopts a disciplined investment approach, he or she will theoretically set a total returns target at the point of purchase and exit when the target is met.

Thus, if a “genuine home buyer” sees his purchase price appreciate by 20 per cent within six months and sell out, does that make him a “genuine home speculator” or a disciplined investor?

Perhaps buyers of uncompleted properties should just be considered as “option demand”, much like the options market in the financial market.

These buyers are taking an option that future prices will be higher than what they are now, so there is no real gain in trying to classify them as genuine home buyers, speculators or investors.

More attention in the media should perhaps be focused on the secondary market activity, particularly on the health of the rental market.

On the demand side, if there is more regular data on the number of employment passes and work permits issued, it will give us a better idea of the pace of inflow of foreigners and thus, the potential demand for rental housing.

On the supply side, a clearer picture on the expected number of completions will be very useful.

A fellow commentator in this paper has often spoken about this need – something that most of us researchers with a more quantitative approach can fully empathise with.

In short, a focus on the fundamental drivers of real estate market might be more useful.

More analysis on whether there will be enough people with the earning power to own and/or occupy property that will be completed should be more useful to determine if price increases are sustainable.

It should help prospective buyers make informed decisions rather than analysing if buyers are “long term genuine home speculators”.

By Tan Kok Keong – head of research and consultancy at Orange Tee.

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