A couple of days ago, I spoke to one of my blog readers whom I met up sometime last year. He mentioned to me that he was waiting for an opportunity to enter the market and purchase a unit at a discounted price. So, when the pandemic came, it became a kind of opportunity. After all, if you were to look at the URA’s property price index, it was almost as high as the peak back in 2012. By looking at the graph, aren’t the prices too high at the moment? Isn’t this pandemic supposed to trigger prices to fall? Like what happened in during the SARS period of 2003?
Well, we are already in the 5th month of this global health crisis. However, the condo that he was looking at did not lower in prices. While it is true that some developers have started giving discounts during this crisis, there others (Parc Esta, Treasure at Tampines, etc.) that have raised prices instead. So, the question is this. Why on earth are these developers increasing prices now? Are they pursuing financial suicide during this time?
First, you must understand that the real estate market, like any other markets, is dependent on the economics of supply and demand. The theory of what goes up must come down, and what goes down must come up is the summarized version of Homer Hoyt’s property cycle. However, if you were to take this finding out of context and apply it to another scenario, you will realize that it does not work. Like any science experiment, if the circumstances are not the same, the results can be different. It is far more critical to understand the supply and demand dynamics at that given point instead.
Properties with Inelastic Demand
In my earlier articles on whether oversupply affects demand, I did a study on Geylang shoeboxes. Despite the price increment and a massive supply in the pipeline, the market is still willing to go ahead and purchase them. In economic terms, we call properties like these having inelastic demand. Whatever the economic outlook, these properties will continue to sell. This is the reason whenever we have a new launch, despite market conditions, a certain percentage of units will always get sold.
Another example of properties with inelastic demand would be BTO flats. Demand for these types of apartments almost always exceeds the supply of units available. If there is a possibility of remaining units available after the initial launch, HDB will sell them under the “sales of balance units” program. Units purchased through this program are always higher than what HDB sells them initially.
Properties With Elastic Demand
On the other end of the spectrum, we have those properties which the demand is more elastic. Some investors like these types of properties because you can buy it cheap when demand is weak and resell it in the future for higher prices. However, purchasing properties like these are relatively risker. You must understand why the demand fell in the first place. Was it because there was an x-factor and the factor is now gone? Or was it a genuine case where the owner had to sell cheap? You may have a perception that you are buying cheap, but in fact, you are paying the correct market value for that property. Examples of these types of real estate include Sentosa houses, high-end developments, as well as specific unit types like penthouses. These are the very same properties that register record profits and also clock massive losses.
How to Understand the Elasticity of Demand
The confusion happens when we do not understand the market well enough. For example, some developments have started to give discounts. The reason why they do so is that the demand for these properties is elastic. Only by offering a lower price then units will start to move. However, if the development you are looking at has more inelastic demand, then things are a little more complicated. There is a possibility that no matter how long you wait, you will never be able to acquire it at a lower price. On the other hand, if you were to purchase a property thinking that it is the best possible price, the demand for that property could be elastic. Prices may fall further than what you have gotten.
Reasons Why Certain Prices Will Not Fall And Why Some Do
Now that you understand different properties have different demand, I believe you now know the reason why some developers chose to raise prices during this time. I will run through a few case scenarios. That way, you would have a better idea of what is the current residential property market and how to react accordingly.
Category 1. Demand is Inelastic, and The Developer Is Maintaining Prices.
If units are continuing to sell, there is no reason for developers to cut prices. Once these units are gone, they disappear from the market unless it reappears in the resale market at higher prices. Why higher? Well, since the demand is inelastic, there will always be someone willing to pay higher prices in the future. Like BTO flats
Category 2. Demand Is Inelastic, and The Developer Is Raising Prices
Profits are the reason why companies are set up in the first place. A company’s sole purpose is to generate a profit. A non-generating profit company cannot exist. Whenever units are selling well, and the developer has already recovered most of the costs, chances are they will raise prices. And this is what some developers did in this pandemic. Otherwise, how do you answer your shareholders?
Category 3. Demand is Elastic But The Developer Not Cutting Prices
For some developers, they have a lot of holding power. In times of crisis, they can afford to shut down the showflat and not sell anything. When times are good, then they will take out the product to relaunch it. For properties like these, demand may be elastic, but because the developer has the holding power, they will never sell it cheap. However, when this happens, the resale market can fetch a much lower price than what the developer is selling. If you are looking at properties like these, you would need to figure out if that property can fit your overall requirements.
Category 4. Demand is Elastic, and The Developer Has Dropped Prices.
If you are one of the earlier owners, expect the value of your condo to remain stagnant for a while. Will prices go back up then? Well, it all depends on whether that condo has an “economic moat” or a specific reason why people will pay more for it in the future. If there is, it will be a good buy. After all, the market is willing to accept a premium for it earlier on. The most important analysis for condos like these is to understand why demand became weak in the first place. If you cannot figure this out, then you are just buying the property at the current fair market value. Whether it will go up in the future is another thing altogether.
Demand May Not Always Remain In A Certain Category
Sometimes it possible for a condo to move from one demand category to another. For example, the units at development have been selling well. Since there is always a demand for it, the developer can decide to raise prices by a few percentage points. Sufficient demand will always mean that the bank can support the valuation. After raising prices a few rounds, sales may start to slow down and even stop. At this point, this product may be classified with demand is that elastic. Why? Because the developer may lower prices anytime without notice.
The process of purchasing a piece of real estate in Singapore is remarkably simple. Understanding the mechanics of what affects prices is another thing altogether. Most real estate professionals will tell you that the profit is made during the time of sale. And now you know why. To get a professional with years of experience on your side, why not speak with us today? Book an appointment with us today, and you will be better equipped on how to react with the property market of today.
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. Book a video call appointment and Jerry will share with you 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.
You can also subscribe to our Facebook page and receive the latest real estate updates in Singapore!