Can the Oversupply of Upcoming Condos Causes Prices To Collapse? Part 2 of 3

This article is part 2 of a 3-part series to understand if the upcoming oversupply of new condos will cause prices to collapse. If you haven’t read part 1, I suggest that you go and read part 1 first to understand the background of the analysis. After all, doesn’t common sense tell you that the price will fall if there is too much supply?

Using Geylang Shoeboxes to Understand The Effects Of A Growing Supply In A Localised Region

In part 2 of this study, I chose to look at Geylang shoebox units for two main reasons. Firstly, shoeboxes are a relatively new product in Singapore’s real estate context. I like to think of them as a new species introduced into an environment where it doesn’t even exist in the first place. So, from the supply point of view, this is a new product that has increased significantly in quantity over these past few years.

Explosion Of Geylang Shoeboxes Supply In 2010 to 2012

Secondly, there are a lot of factors that affect prices when it comes to real estate. Things like lease tenure, facing, amenities, schools, transportation nodes all play a small role in determining the selling price of the condo. So having the analysis done on a specific unit type in a zone such as Geylang is crucial. Why? Well, because most shoebox units there are freehold and located in a low-rise environment. Due to the similarly in product type, other variables (such as facilities, building design, etc.) can be considered insignificant to affect major changes in data.

Range Of Geylang Shoeboxes Used In This Analysis. Source: 99.co, Google Maps

Why Increase in “Supply” Causes Prices to Go Up

So, the big question is this? Why did a brand-new shoebox unit in Geylang go from $3xxk back in 2006 to $7xxk in 2020? Weren’t there more units produced? Hasn’t the supply increased tremendously? Why didn’t the price drop below $3xxk? How can it go up when there is so much supply of them in the market?

Difference Between Movement and Shift in The Supply Demand Curve

I think a lot of people confuse the increase in future “supply” of housing to mean the movement in the supply and demand chart. When we look at the graph, the supply and demand curve intersect at a point called equilibrium. At the equilibrium point, the quantity supplied is equal to the amount demanded. In situations like these, prices remain stable. However, when the amount produced far exceeds the demand, that’s when prices will collapse. The converse is also true. Just think of the recent coronavirus outbreak, where the usage of masks is so overwhelming that some online sellers resell them at ridiculous prices.

Movement In the Supply And Demand Curve Due To Increase In Quantity

Cost Of Production Causes Shift In The Supply Curve

Movement in the supply and demand graph is only valid by assuming that the cost of production is the same. In Singapore’s real estate context, we know that this is not the case. New land plots are almost always more expensive than existing ones. The reason behind it is that land costs and construction costs go up over time. With the two primary components of building a condo that is almost always rising over time, a developer can’t sell you the same condo at the same price ten years later. So instead of a movement along the supply and demand curve, the curve now shifts to the “left”.

Shift In The Supply Curve Due To Higher Costs Of Production

Are Consumers Able to Accept the New Pricing?

What happens next is then the market’s reaction to this new pricing. Is the market willing to accept this new pricing? Are they ready to go ahead and pay more for condo B? If they are, that means that the demand curve is relatively inelastic. If nobody is willing to pay for the condo, then it means that the demand curve is elastic. Understanding this part is important because for an elastic demand curve, waiting for prices to fall would make absolute sense. While for an inelastic curve, people are just going to buy even though the quantum is higher. This reasoning is the basis behind the concept of the first movers’ advantage. And why most agents tell you that for real estate, it is better to buy and wait. Not wait to buy. Because generally speaking that’s true to a certain extent.

So How to Determine If Demand for Geylang Shoeboxes are Elastic or Not?

One of the best ways to determine if a demand curve is elastic or not is by understanding sales volume. If the sales volume is sufficient to absorb the new pricing, the curve is relatively inelastic. Of course, if you have the time, you can quantify this elasticity of demand yourself. For simplicity sake, I will just show you the volume and the PSF price trend of the Geylang shoeboxes.

Using volume to understand the elasticity of demand

From the graph, even though the prices have gone up, people are still willing to purchase them. Demand for these shoeboxes has remained somewhat consistent. When this happens, the demand curve should look something like this instead.

An example of a perfectly inelastic demand curve

Why It Is Not Possible to Buy A Geylang Shoebox Unit at $3xxk today

The primary purpose of this article is to clarify the confusion some people have with the supply and demand curve. An increase in quantity doesn’t mean that there is movement in the supply/demand curve. Instead, due to the higher production cost of the product, there is a shift in the supply curve. When this phenomenon happens with sustained demand, prices will continue to increase. This inelastic demand is the reason why it is not possible to buy Geylang shoeboxes at $3xxk today even though there are so many of them now.

Although demand for Geylang shoeboxes may be relatively inelastic, the same cannot be said for shoeboxes throughout the rest of the island. Besides, the demand curve for another bedroom type in Geylang may tell another story altogether. The understanding of the elasticity of demand is critical because this knowledge allows you to enter the market at any time to see your asset grow in value. Like I always say, what you buy is far more important than the timing of the market.

Singapore’s Real Estate Market Is No Longer Easy To Decipher

The real estate market of Singapore today is a complex creature to decipher. With the introduction of TDSR and ABSD, the entire property cycle is now disrupted. When you don’t have a cycle, how can you predict when prices will collapse? I will cover more on the effects of the cooling measures in part 3 of the series. The good news is that while we cannot predict price drops, it is still possible to figure out which unit types have more inelastic demands. Having this knowledge is crucial in understanding which properties have a better potential for upside. And this reason is precisely why waiting for prices to drop for a particular product type (like Geylang shoeboxes) will not work. To understand more on how we figure this out, do fill in the form and we will get back to you shortly.

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

  1. How certain factors affect real estate prices. Why some condos can make a million dollars while others can lose that same million.
  2. 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!
  3. 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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