History does not repeat itself but it does rhyme

The Singapore residential property market has recently exhibited pricing anomalies that remind us of the conditions prevalent during the last market peak in 2007. Back then, exuberant market conditions as well as their own ingenuity allowed property developers to sell some large luxury residential units at a higher price per sq ft (psf) than the smaller units in the same project.

This time, history did not repeat itself but what we have now sure sounds like a rhyme.

In October 2007, a 5,048 sq ft penthouse unit at Orchard Residences sold for a then-record price of S$5,600 per sq ft – significantly higher than the project’s average price of around S$3,300 psf based on caveats lodged by purchasers. Other developers held auctions for their penthouse units in hopes of achieving a higher per-square-foot selling price – and they largely succeeded.

That was a pricing anomaly, as small units are normally sold at a higher price per sq ft than larger units (similar to retail versus bulk prices in consumer items). In hindsight, this anomaly turned out to be a warning sign indicating the market’s over-exuberance, as residential property prices subsequently fell by an average of 25 per cent in 2008 and the first half of 2009.

Fast-forward four years to today – we are now facing a different form of pricing anomaly.

With the rising popularity of small “shoebox” units as I highlighted in this column last month (“Shoebox trend a boon for developers and retailers,” July 15), the pricing pendulum seems to have swung to the other extreme.

Based on caveats lodged on some recent residential property launches, shoebox units are currently selling at a large price-per-sq-ft premium of 30 to 80 per cent over three- to four-room units in the same project.

For example, The Lakefront Residences, a popular project launched in the Jurong Lakeside precinct late last year, saw its small units sold at around 80 per cent price premium to the larger units. According to the caveats on the project, shoebox units of less than 600 sq ft sold at an average of around S$1,300 psf, well above the average S$700 psf price for the larger units with floor space of more than 1,500 sq ft.

While I have said that smaller units should be sold at a higher price per sq ft, a premium of around 80 per cent does seem like an anomaly to me.

A hint of things to come?

Other than this pricing anomaly, another interesting – and potentially foreboding – trend worth highlighting is that in past years, every time the Government introduced significant measures to cool residential property prices, it was followed the next year by an external crisis that triggered a sharp correction in prices.

For example, in May 1996, the Government introduced a capital gains tax to curb residential property price increases. This was followed by the Asian financial crisis in 1997, which triggered a sharp price decline in the market from 1997 to 1998.

Another example is in October 2007, when the Government introduced measures to stop deferred-payment schemes in the residential market. Again, this was followed by an external crisis – the US subprime fiasco of 2008 – that triggered another tumble in the local market. Singapore’s residential prices (mainly private properties, as public HDB flat prices held relatively steady due to supply shortage) fell an average of 25 per cent in 2008 and the first half of 2009.

By now, readers will have sensed the uncanny resemblance between the current conditions and those of 1996 and 2007. Over the last 12 months, the Government has introduced a number of harsh measures to cool the residential property market – including sharply higher seller’s stamp duties and lower loan-to-value ratios for mortgages – while global macroeconomic conditions have turned increasingly uncertain, especially over the last few weeks.

In addition, the pricing anomaly that we are currently seeing in the form of the huge price premiums commanded by shoebox units also reminds us the over-exuberance we saw in 2007.

However, it is also not all bad news as the uncertain macroeconomic conditions would mean that low interest rates, which have been supportive of residential property prices so far, would stay for a prolonged period.

But if the quote “History doesn’t repeat itself, but it does rhyme,” is to be believed, then Singapore’s residential property market may not be singing as sweet a tune as before.

By Tan Chin Keong – an analyst at UBS Wealth Management Research.

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