8/22/2009

Property prices, an exercise in illusion

We have this property frenzy turning more crazier by the days. How much of this is real and how much are concocted to give the impression of real demand and real affordability? The ST carries several pages today with two conflicting views, that property prices are really affordable and with some cautioning that a bubble is in the building and we will have our property crisis like the US in the next economic downturn. Would we hear some sensible words of advice on this happy tragedy that is waiting to happen, or everyone is happily playing the monopoly game? A report by Citigroup economist Kit Wei Zheng said that prices at 19 times are now more affordable compare to the 40 times annual income of 1996. It is a relative game. From 40 times to 19, everyone should be cheering and rushing to get one unit. It is less than half price! The crazy and irresponsible thing is to let this go on and on. In fact it was utmost irresponsibility to let prices shot up to 40 times the annual income of the buyer at the average Singaporean level. But no one cares. Ahhh, caveat emptor. Nothing can be done. It is all good business and individual responsibility, and free market. Wny are we so concerned about people gambling in the casinos? Take a 20 year annual income as an example. It would mean that the buyer would need to pay every cent of his income for 20 years to fully pay up for the unit. And this also isn't true as the mortgage plus interest for 20 years will easily work out to be double the amount, ie, he needs to pay for 40 years instead, every single cent. Let's say that he uses half of his income to service the loan, wow, does it mean that it will take him 80 years to do so? Ok, double income family. So maybe 40 years to pay up. Still sounds good, provided neither of them loses his/her job. Then the increments and promotions along the way will make the repayment much easier. But still a 30 to 40 year repayment and a sum that is not small. In 1975 a semi D cost only 2 years of annual income, a 5rm HDB flat cost slightly more than 1 year annual income. That was why those who bought into properties then could sit on huge profits from asset appreciation. With today's prices, is there going to be a profit at the end of 30 years? We are assuming that many Singaporeans are rich and able to afford such properties looking at the attendance in property launches. We are also assuming that many Singaporeans in the future will be able to pay double the current prices if the present day properties are going to appreciate in value. What is very likely to happen is that in the next 10 to 20 years, there are bound to be several economic turmoils along the way, and people paying high prices and servicing high mortgages are going to be hanged for sure. For the time being, enjoy the party...if it is for real. Let's see who ends up with the baby when the music stops.

17 comments:

Wally Buffet said...

Do you still remember the price extrapolation formula I posted here sometime ago. Well, everyone is banking on the fact that the Govt. is very determined to increase our resident population to 8 or maybe even 10 million with the likes of Jet Li and Gong Li being our poster new citizens. So being very uniquely Singaporeans, they "chope" first and think later. Also as HDB lessors are allowed one private property, why not? Like I said before, investing in "structured products" or other mumbo jumbo variant is now passe. People want to see and feel their assets, not just buying contracts such as insurance policies. And lastly there is the herd mentality, the kind of "restaurant" syndrome that says if people are queuing outside eateries, the food must be good!

Anonymous said...

"Let's see who ends up with the baby when the music stops."

It's more like who ends up like the cry baby when the music stops. Most likely too, these are the very ones who complain about lack of government aid for housing when they end up losing big time.

Prudence is wise, greed is folly.

redbean said...

every average singaporean should know that they need to spend half their lifetime income to pay for a 99 lease for a flat that is about 1000 sq ft. this is the quality of life that the average singaporean can expect. and the size of this flat is going to get smaller in the future. but the quality is getting better.

we have plenty of land to built plenty of teeny weeny flats for small people.

Anonymous said...

Our brillant $3 million ministers are calculating that a HDB 3 room would cost S$10 million in time to come.

Do you believe?but 666% do so in Singapore.

Wally Buffet said...

Hehe.

I am one of the 66.66% So listen to Wally boy. Go buy up some condos. You could be a zillionaire in due course.

LMAO.

redbean said...

wally, it used to be a good reason to do so. but at 20 times an average sinkie's annual income, whichever angle you look at, it is insanity.

yes, a 3 rm flat will eventually be $1m and a plate of chicken rice will be $30. and the workers salary will be $5k. and everyone will think that their incomes have gone up.

it is a joke to work for 20 years to pay for a stupid flat, no land mine you, and 99 year leasehold.

Anonymous said...

To be fair, no Singaporean is forced to stay in SIN forever.

Make your money, prosper and leave. The value of your SIN Dollars multiplies many folds elsewhere beyond our shoreline.
Lijiang, Batam, Bintan, Johore, Penang, Northern Thailand, Nepal.
See, plenty of Shangrilas.

Leave, go and seek peace and be at peace.

patriot

redbean said...

actually this is the unofficial formula for singaporeans. make your money, sell your HDB flat, take out your CPF savings and go seek your next paradise, and live like an emperor.

their places shall be filled by new and more energetic immigrants to grow their wealth. the catch is that the new citizens may not be so lucky as the future govt may not be as good as the present one and their investments may turn to naught.

Wally Buffet said...

Patriot,

Most sensible comment thus far. No one forced me to stay so I'll rather look out at the Snow Mountain in Lijiang with wind chimes whistling softly in the background than the dreary skyline here anytime. In that 1 square kilometre from Raffles Place, is the source where all the riches of this island radiate. But riches of what? Certainly not peace and tranquility.

Wally Buffet said...

When all the original Singaporeans leave, this city will turn into Gotham. You may need a Batman to assist in law and order. The original Singaporeans are a hardworking albeit wily lot, easy to govern, obedient and kiasu, kiasi, kiabo which are traits that can be positive for governance. Not so the new immigrants. Gungho troublemakers, used to protests and demos in their country of origin, disrespectful of the law in short, not easy to govern. The original Singaporean, unique and found nowhere in the world but now dispersed all over the world. Sad.

Anonymous said...

Wally:

thank You for your concurrence and me too is very agreeable to the Last Comment You made here.

Sad indeed !

patriot

IMAGOD said...

What cock are you talking lah redbean? Land is a very very scarce resource in S'pore and as long as the population keeps increasing... no matter how much you fuck around with plot ratios and height restrictions.. the fact remains, land is scarce.

Scarcity is reflected in the price, as you well know. So why complain? Just allow the market to adjust and the people to adjust their behavior and choices.

And a lesson for those emigres perhaps: don't sell up your properties in S'pore if you are planning on being a "quitter". Don't be silly. If you can afford it, hang onto your real estate. You might even find that you can live in your new home country "free" — simply off the rent returns from your S'pore real estate.

Property prices — rising and falling as they do — will trend upwards in S'pore. That is reality. If you don't like it, that's tough. Reality won;t change just because you don't "like" something.

redbean said...

matilah, i don't believe in absolute free market mechanism and neither do i subscribe to an absolute command economy. if we believe that no one can control the free market prices, supply and demand, esp in public housing, then we can expect a classic communist revolution in the making.

as the income gap keeps widening, the the lower 60% keep struggling to catch up, and when they can't catch up, i can guarantee you that the country will implode in a matter of time.

redbean said...

oh, your suggestion of renting out the flat here to live on the rents is worth considering, instead of selling off outright.

Anonymous said...

Singaporeans should give up the idea of working. Just make money buying and selling shares and properties.

The old idea of being productive is out of date. Now they just make money buying and selling shares and houses. Who needs to work? Who needs to be more productive? It is now all bullshit.

redbean said...

there are more letters to the forum in ST on how expensive or affordable are our flats. and i have the feeling that they are all talking rubbish like me : )

i am sure the professional analysts are right. would any worthy reporters or journalists like to write some well research and quality articles on this subject? or is it a taboo subject?

IMAGOD said...

> i have the feeling that they are all talking rubbish like me : ) <

I have a feeling you are correct. Most people don't understand economics anyway. When they can't afford something or find something "expensive" they seek to confirm that the fault is something or someone other than themselves.

> i am sure the professional analysts are right. <

Good for you. I tend not to believe anything anyone says just because they claim they have "authority" or "credentials"