Oversupply Causes Prices to Collapse?
Earlier this month, I met up with a few colleagues over a Chinese New Year celebration lunch. Meetups like these very important because we get to share information. That way, we are always updated on the latest market news faster than everyone else.
During the lunch, one colleague mentioned that she saw a YouTube video about someone talking on the oversupply of housing that is coming up. The content creator was sure that the market would not be able to absorb this upcoming supply. And that prices will most definitely fall. For this fact alone, you shouldn’t trust any agents who are asking you to purchase any private homes during this time. As the Chinese saying goes, 物以稀为贵. So, how can the price of property go up since there is going to be so much stock?
URA Pipeline Supply
I most certainly agree that the pipeline supply of housing in the market is higher than what we had a few years ago. If you were to go ahead and check the statistics yourself, URA stated that the 3rd quarter of 2019, there is a pipeline supply of 50,964 new homes. Now compare this with the data back in the 3rd quarter of 2017, pipeline supply is only 35,022.
However, a lot of people confuse this increase in quantity and assume that this extra inventory will cause movement in the supply-demand curve. What they fail to realise is that the supply-demand curve has shifted instead due to the higher cost of land and construction prices. Confusing? Consider this.
- Some of you might remember Geylang shoebox units. Back in 2006, prices were going at $3xxk. To some people, it was a good buy while others think that it wasn’t ideal to own a shoebox in the area. If you were to look at Geylang today, shoeboxes are everywhere. The supply has exploded in the last 14 years, but new unit prices now start at $7xxk. Why?
- In my earlier article on “Waiting for prices to drop. Is this a good idea?” I have written about a condo which was sold back in 2017. If you remembered the pipeline supply back in 2017 was only 35,022. Compare this with today’s 50,964 new homes, and you will realise that the numbers have gone up. However, this very same condo made a paper gain of $700k. Why?
The reason for this 3-part series is to let you understand the mechanism of what causes prices to collapse. Once you have a better idea, you can deduce for yourself whether prices will fall anytime soon.
Why Do Prices Collapse? Past examples.
The reason why prices collapse is simple. First, you must have a bubble. The formation of a bubble is created when the surge in asset prices ignores the fundamentals of that asset. Bubbles happen when there is too much exuberant market behaviour. People enter the market because of the fear of missing out (FOMO). Greed takes over, and we make irrational choices and buy the asset at way above market prices. Even geniuses like Sir Isaac Newton (yes, the very same person who discovered gravity) made the very same mistake.
Sir Isaac Newton And the South Sea Company Bubble
Back in 1720, Sir Isaac Newton owned shares of South Sea Company. One of the hottest stocks in England during that time. Back then, he felt that the market was getting out of hand, and he sold it for 7000 pounds. However, the shares of the South Sea Company seem to defy gravity (pun intended) and continue to rise. That’s when Newton re-entered the market before the collapse and lost more than 20,000 pounds. By today’s standards, that’s about $2 to 3 million dollars.
Perceived Value Versus Actual Value
The reason why Newton re-entered the market was that there was a perception that the market value of the product will continue to rise. However, what he failed to realise was that the price he paid for far exceeded the market value of the actual product. When this happens, it is only a matter of time before the price corrects itself to the original market value.
The problem with the South Sea Company was that the directors circulated false claims and successful stories which generated attention in the company. Government endorsement followed later and further fuelled interest in the company, thereby creating the start of a bubble.
Past Bubbles in Singapore’s Property Market
Like all asset bubbles, Singapore has seen its fair share in the property market as well. The creation point of all bubbles is the same. There is always a beginning where the demand significantly outstrips the supply and prices starts to climb. That’s the time when new launches are 100% sold either within a few hours or the same day. Following that, developers will price units aggressively, or the sub-sale market will thrive with some owners flipping the property for huge profits.
An Example of Singapore’s Property Market Bubble Back in 1996.
Take the example of this condo in River Valley. Back in February 1994, the first owner bought from the developer at the price of $538,125. This 1098sqft unit was subsequently sold to another party in May 1996 at $1.130mil. Within a short span of 2 years, the first owner made a profit of $591,875.
Was there a bubble back in 1996? The questions you must ask yourself is this.
-Was the current price in 1996 a fair market value? Are there any reasons to support this pricing?
-Was the existing supply in the market snapped up within a matter of moments?
-Are the rental prices enough to support the massive increase in prices? Did rental prices double during this time? Can they cover your interest costs?
-Did people’s income double from 1994 to 1996? How many people can afford a $1.13mil condo back in 1996?
Answering these questions will allow you to understand if the product you purchased was above or below the actual value. And hence determine for yourself if there was a bubble or not. Of course, we are now in 2020, and we already know the ending to that story. In 2006, the same unit was subsequently sold at $800k—a loss of $330,000 for the 2nd owner. However, prices did not fall back to $538k because people’s incomes have risen, and there is enough demand to support that property at that price.
Always Look at Numbers. Never at Sentiment.
The reason for writing this article is because several readers have texted me and asked me for advice. These buyers wanted to know when a good time is to enter the market. Due to the recent outbreak, the world economy is at stake, and everything may fall like a deck of cards. Should I wait later for prices to fall so I can scoop up cheap deals along the way?
I always tell my clients not to believe in market sentiment but rather look at the numbers instead. That way, your perspective is always clear, and you can judge for yourself if prices will collapse. In part 2, I will go into detail with regards to the shift in the supply-demand curve. Because logically speaking, the supply of shoeboxes in Geylang has gone up tremendously. So, if the theory of oversupply causes prices to fall, why is it impossible to find a shoebox unit at $3xxk or even cheaper today?
As for part 3, I will dissect the government’s cooling measure and give you the rationale of why they used a 2-pronged approach to cool the market. Both the TDSR and the ABSD has its mechanism to prevent the formation of a bubble successfully.
Is there a Bubble in Singapore’s Property Market?
To understand if the current property prices in Singapore’s will collapse is rather simple. Just figure out if there is a bubble or not! With the incredible power of technology and the internet, there is a way to find out the answer instantly. One of the sources you can check is available at Union Bank of Switzerland (UBS) where they publish data on real estate bubble index throughout the world. From there, you will be able to understand which cities are at risk of a pricing collapse and when it is better to adopt a wait and see approach.
Purchasing a property is one of the most significant decisions in our life. How we decide to react to the market is highly dependent on how knowledgeable we are. To understand all the mechanisms of price movements and make sense of all the numbers, why not speak with us today? We’ll equip you with the all knowledge to understand how to react with today’s property market.
Article contributed by Jerry Wong
Jerry Wong is a realtor with Propnex Realty. He loves coffee, cookies and condos. Most importantly, he loves connecting people to properties and gets enormous satisfaction when they acquire their dream home. Or making well-informed decisions that see their assets grow. Buy Jerry a coffee, and he will meet up with you on a 1 to 1 session to share the following
- How certain factors affect real estate prices. Why some condos can make a million dollars while others can lose that same million.
- Why timing is not the most important thing. Because some people can buy the same condo at the same time. But one end up making $100k to $200k while the other suffers losses of the same amount!
- Understanding your requirements and craft a solution for your real estate needs. Be it in the form of asset progression, tax planning, etc.
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