More price upside for landed homes

Prices for landed properties have skyrocketed by 63 per cent since the property market hit a low in the second quarter of 2009. In the 12 months of last year, the overall landed property index climbed 30.8 per cent, with prices for detached houses gaining a whopping 37.6 per cent, while prices for semi-detached and terrace houses grew 26 per cent. While most home searchers believe that landed property prices have reached their peaks, I think there is more room to climb.

Total stock

The total number of completed landed properties in Singapore is 69,743, comprising 10,350 detached houses, 21,185 semi-detached houses and 38,208 terrace houses.

Those were the numbers as at Dec 31 last year. Of the total, 2,294 landed houses are classified as vacant, representing a vacancy rate of 3.3 per cent. Most landed homes are owner-occupied. This is because foreigners face restrictions in buying such properties, such as the requirement to apply for permission to own one landed house and then not being able to lease it out. Therefore, the pool of investors trading landed properties is smaller compared to that for condominiums.

Included as vacant units are houses held in estate due to inheritance issues and those that may have been left in disrepair for a long period. These numbers reflect a structural vacancy of probably about 1,000 units that are not usable or not for let.

The vacancy rate for landed houses is much lower than that for non-landed housing, which at the end of December last year stood at 5.6 per cent, that is, 10,589 vacant units out of a total stock of 188,500 units.

Demographics and population

One version of the Singapore Dream for Generation X goes like this: Queue to buy an HDB flat, work hard and save up for a few years, sell the HDB flat for a profit and upgrade to a private condominium for the growing family, then if finances allow, upgrade to a landed property that can be bequeathed to descendants so that they can have a piece of home soil they can call their own.

If we define Generation X to be the population segment born between 1960 and 1980 (i.e. the segment who were 30 to 50 years old last year), we see from the chart that they make up 1.25 million people, equivalent to 33.2 per cent of Singapore’s resident population of 3.77 million as at June last year.

Here we define resident population as Singapore citizens and Singapore Permanent Residents (PRs).

The population distribution is bunched up in this segment partly due to the higher birth rates between 1960 and 1980 as compared to today and partly due to immigration policies attracting economically active foreigners to set up their roots in Singapore. (Note: The “Stop-at-Two” campaign was introduced in 1966 but families with three or more children were not uncommon.)

Property evolution of Singapore families

Based on population data published by the Department of Statistics (refer to Chart 1), for a Generation X couple who entered into their first marriage in 1999, the groom was likely to be born in 1970 and the bride born in 1973. These couples would have received the keys to their first HDB flats soon after the wedding. A small group of these couples with high flying careers would be able to upgrade to private apartments after 2005, after the five-year wait if they had purchased their flat directly from the HDB.

Couples who come from wealthier backgrounds might skip the HDB flats and have private properties as their first matrimonial homes.

Now fast forward to this year. These couples are around 40 years old and they would likely have one or two children. The children would be approaching their teens. A fraction of this group who has the means to upgrade into private apartments will now be looking around for their next upgrade, in search of more space for the growing families. One solution: Landed properties.

There were nearly 26,000 marriages in 1999. Barring divorces and additional immigrant Singaporeans, we have a potential pool of 26,000 upgrading families. Not every family has the means to purchase a landed property and even those who have the means may not have the desire. But if we assume that 1 per cent of these families do desire and are seriously looking to purchase landed properties, we have 260 families in search of a landed home.

The example above highlights couples in the middle of the Generation X segment. While some may still be searching for their landed properties, those who were born in the early ’60s may have already achieved their Singapore Dream and are already living in a landed property.

However, those born in the late ’70s would have been married within the last five to 10 years, statistically speaking, and are still in the first and second stages of their property evolution: HDB flats and private apartments.

On average, if each cohort of Generation X-ers produced a demand of 260 landed properties, 20 cohorts will create a demand for 260 times 20 = 5,200 landed properties today.

Our assumption could be optimistic or conservative. But based on the instructions we have been receiving from clients, the demand for landed properties is strengthening.

Do note that in this commentary, we have yet to account for the potential demand from future new Singaporeans who may be added to the population. More often than not, new Singaporeans who were high-net-worth Malaysians, Indonesians and Chinese, for example, are more used to living in landed properties in their country of birth.

Sufficient supply in the pipeline?

As of December last year, there were 1,752 units of landed properties already under construction and expected to be completed between this year and 2015. Another 2,211 units have been planned but construction has yet to begin. On average, we can expect an annual supply of about 800 landed properties per year from 2011 to 2015.

The supply in the pipeline is made up of landed properties in Sentosa Cove, cluster housing developments as well as strata-landed houses within condominium developments such as The Vision and d’Leedon.

Excluded from the table above is a Government Land Sales site for about 80 landed houses on the Confirmed List that will be made available to developers in June this year. Unlike the condominium segment, where projects of over 100 residential units are commonplace, there are no major projects for the landed property segment which will provide fresh supply in a big way.

My sense is that there will not be enough new landed homes to cater to the demand due to the demographic changes and lifestyle needs of the Generation X-ers.

Prices to rise at measured pace

Although we expect demand for landed properties to exceed supply for the next few years, the prices for landed properties are expected to rise at a more measured pace than last year.

Recent policy measures for residential properties have dampened home buyer sentiment due to the loan-to-value ratio being lowered to 60 per cent. Investors who are buying old landed properties for re-construction would need to borrow more on the construction loan because they have put in an additional 10 per cent of their cash into the old house.

Since obtaining a higher construction loan might not be easy, some investors have decided to go for lower price quantum, preferring intermediate terraces to corner terraces, or semi-detached instead of detached.

With the continued demand from Generation X upgraders, I believe there is ample room for landed property prices to trend up. Furthermore, prices of landed properties continue to lag behind those of apartments and condominiums.

The price gap between non-landed properties and landed properties has narrowed in the last two years. At the end of March 2009, terrace houses, semi-detached houses and detached houses transacted at discounts of 23 per cent, 36 per cent and 38 per cent, respectively, versus non-landed units. At the end of last year, the gaps have narrowed but prices still stand at significant discount to non-landed properties: 14 per cent, 30 per cent and 26 per cent, respectively, for terrace, semi-detached and detached houses.

What about the risks of a downturn? Any potential downside for landed property prices will be limited due to the profile of the owners: Senior professionals and business owners who generally have low levels of loans, for example, below 70 per cent. The holding power of the landed property owners is high, and there is low likelihood of cheap sales.

Even while the overall residential prices remain flat, prices for landed properties will increase at a more moderate pace. For those who are undecided about moving into the landed property stage of the property evolution, my advice is, don’t wait for a price drop: Just do it.

By Ku Swee Yong – founder of real estate agency International Property Advisor (IPA).

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