Predicting the Future 101
This article is more of a disclaimer post since I will be starting to write reviews on new condo launches. I’m sure you have read condo reviews by bloggers, reviewers and forum posters. Some say this condo is a good buy while others say it is a life changing mistake. Then there are those who say the timing is not right now. You should only enter the market and scoop up properties when they dirt cheap and flip it later on. The motivation for the articles may stem from selling them, or just a means to get attention. But whatever it is, they all share a common mistake. And that is.
There is absolutely no way to predict the future
Back in 2010, when I was acquiring a property for the family in the central region of Singapore, there was a resale condo unit going for $1.15mil. This property was the highest priced unit in the entire development. Not only that, but it also happens to be the highest historical price as well since its initial launch. In other words, in the eyes of many, this is going to be a terrible buy. In fact, from what I heard the seller was so convinced that the market is at the peak and the crash is imminent, he decided to sell off all his properties and stay in a rental instead. So when the property market crashes, he will be back to scoop up a similar unit for a song.
The property today is currently valued at around $1.5mil. A paper gain of $350,000 or about 30% of the initial price. An annualised increase of 3%. Not exactly a terrible buy. So what happened? Isn’t the market supposed to crash back then? Wasn’t prices at the peak? Well, a lot of people has this misconception that timing affects prices. But actually, it is the effects of supply and demand during that time that affects pricing. Not the particular time frame itself. Pretty much like the common saying that “money is the root of all evil.” The more accurate version would be the “love” of money that is the root of all evil, rather than money itself.
Wait a minute, isn’t the property market cyclical in nature? Origins Of The Property Cycle
The first recorded pioneer who discovered this phenomenon was Homer Hoyt. He was an American with a PhD in economics who realised that there is a pattern that follows the real estate market in Chicago. He has written a book called “One hundred years of land values in Chicago” explaining the rationale behind the property cycle. The main reason is that real estate takes time to complete. This delayed supply, coupled with sudden demand creates a pattern of boom, bust and recovery. Here are the excerpts from the book on how the cycle works.
- The Initial Impulse – Sudden surge in population growth
-Back in Chicago, economic conditions were favourable, and this attracted a tide of people looking for employment. Hence, resulting in a surge of population in the city.
- The supply of houses cannot be immediately increased
-Well, this pretty much explains itself.
- Qualifications to the influence of the population on the real estate cycle.
-The sudden population growth, may or may not contribute to a boom. The impact is highly dependent on the profile of the population that will affect the real estate market.
- Net rent starts to rise rapidly
-Increase demand from the sudden increase in population
- Rising rents also mean higher selling prices
-Again, this pretty much explains itself
- It makes financial sense to start to build new buildings
-With dwindling supply, the business model of real estate development would make sense
- The volume of construction rises
-When there is money to be made, everyone wants in.
- Easy credit stimulates even higher volume
-Higher profits also mean more accessible lending from banks and creditors to speculators
- Shoestring financing increases even further number of new buildings
-Competition from easy finance means more projects in the pipeline with very little initial capital outlay
- Land Boom
-The increase in demand for new buildings also means that vacant land nearby is absorbed or acquired. Much like our local enbloc sales
- Optimistic population forecast during this boom
The time when some “distinguished scholars” will come out and out and say that the population will continue to increase.
- The vision of new cities in cornfields
-Not applicable in Singapore’s context but the objective is to sell a consumer the idea of a piece of land in the outskirts which has the remarkable potential of redeveloping into a new town and considerable profits to be earned. Where, in reality, it does not happen.
- Lavish expenditures for public improvements
-In Chicago’s context, some simple infrastructure was built on the land. This improvement gives consumers confidence that the area is redeveloping. However, in reality, the redevelopment is not happening.
- The Peak.
-Various factors that influence prices come together to produce the maximum effect. Volume is also at its highest. The formation of the bubble.
- The Reverse Movement Begins
-When the underlying factors(such as population growth, rent increases, new construction activity) reverse their trend, the market will start to go into a dull phase.
- Foreclosures increase
-In Singapore’s context, this is what we call mortgagee sales. During this time, heavily mortgaged individuals who cannot afford to service their loans will need to sell their properties.
- The stock Market debacle and the onset of depression in general business.
-The real estate business goes dull
- The process of attrition
-Increasing unemployment means these workers will move from the urban/city centres back to the rural areas where they can live more cheaply. As a result, the population within the city centre drops
- Banks reverse boom policy on real estate loans
-As the risk increases, banks become more prudent in their lending
- Period of stagnation and foreclosures
-During this phase, nearly all aspects of real estate activity are suspended. Rents drop by 50%, and rents cannot cover interest costs on the mortgages.
- Wreckage is cleared away
-Around 4 to 5 years after the stagnation, recovery begins. Rents start to increase again, and it is now profitable to build houses all over again. The best time for investors will come in and scoop up properties on the cheap and flip it later on for big bucks.
- Ready for another property boom
-May or may not happen. The boom is mostly dependent if there are economic opportunities that result in sudden population growth.
Application of The Property Cycle In Singapore’s Property Market
From Homer Hoyt’s perspective, it seems that the property cycle is doomed to repeat itself. As a result of this pattern, it would appear that it is possible to predict what is going to happen in the future and pick up real estate on the cheap. Commonly known as “what goes up must come down.” However, the analysis does not account for these factors which are present in Singapore’s property market
- While there are plans to increase Singapore’s population to have a bigger internal market, the population increase is primarily governed by the government. With transportation nodes at every corner of the island, there is no such thing as a “rural” or “urban” part of Singapore. You can’t migrate to a city centre or move away because the entire island is essentially a city.
- In Homer Hoyt’s context, I believe he is referring to a particular type of real estate which are landed houses. In Singapore’s context, we have HDB, private condos and landed housing. All of which follows a cycle of supply and demand that can be somewhat different from the other. In terms of context, public housing is meant to be affordable. Similar to the rationale of why the government is more concerned with MRT ticket prices rather than the cost of the latest Mercedes model.
- The government controls the supply of land. Not only does the government control the demand in terms of population, but they also control the source of new land parcels sold. Of course, developers can circumvent this by purchasing enbloc sites for redevelopment, which is another source of supply.
- Cooling measures. The single and most effective way by Singapore’s government to control supply and demand with immediate effect. These ranges from TDSR, stamp duties to enbloc sales restrictions.
So how to predict the future?
Since Singapore does not follow the entire cycle observed by Homer Hoyt in Chicago, naturally, the sequence of the boom, bust and recovery is unlikely to happen here. Which makes predicting or timing the market an impossible task and why so many people get it wrong. Like the anticipated market crash of 2010, which didn’t arrive.
While we cannot time the market, it is possible to predict what is going to happen within a particular locality. These two “predictable” factors are
- Future changes in the vicinity. The Singapore government is very transparent, and this data can be easily found at URA to understand what are the upcoming developments around a particular region.
- Developer’s future pricing. It is possible to predict to a certain degree of accuracy as to what developers are selling the condo prices before they are open for sale. Here are a few examples.
My predicted price of
–Treasure at Tampines $1333 psf. Actual median launch price $1335 psf.
–Parc Esta at $1636 psf. Actual median launch price $1699 psf.
–Riverfront Residences at $1372 psf. Median launch price $1307 psf.
–Stirling Residences at $1821 psf. Median launch price of $1746 psf.
By understanding these factors and coupled with Homer’s analysis on what causes price increment, it is possible to know to a certain degree which developments have a better potential upside compared with others. As shown in my earlier articles, purchasing the correct product is far more critical than buying the wrong one at a “right time”.
Do you need to understand what a future condo is going to sell even before the showflat opens? Need help in identifying the “right” project to buy? Or wondering if now is a good time to sell instead? Free feel to contact us, and we would love to meet up with you and share our analysis.
Article contributed by Jerry Wong
Jerry Wong is a realtor with Huttons Asia Pte Ltd. 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 make that capital upside in just a matter of months. 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. (Using historical transactions as references)
- Applying lessons from history to determine if a condo has the potential for upside or not. These condos can be those under construction, resale or the very one you are staying in right now.
- Or just prepare the toughest question you have on your mind! If it is interesting enough, the answer will be in a blog post and shared with everyone!
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