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.