Is the demand for residential property in Singapore sustainable? – the “6 Million” question

By Getty Goh

The recent URA Private Property Price Index for 2012Q3 caused quite a stir in the market as many observers noted that the private residential price index continued to climb and we are currently at an all-time high at 208.2. As I often give talks on the property market, a question I frequently get is whether the demand for residential properties in Singapore is sustainable.

Some participants have voiced their concerns, especially after a recent newspaper article reported that there were more than 100,000 residential properties in the pipeline (http://www.stproperty.sg/articles-property/singapore-property-news/coming-up-over-100000-housing-units/a/91314).

Will there be an oversupply in residential properties?

In a dialogue session that was conducted in Sep 2012, Singapore's Prime Minister, Mr Lee Hsien Loong commented that Singapore's population target of 6 million "should not be a problem". (http://www.todayonline.com/Singapore/EDC120924-0000038/The-6-million-question). According to another news report, as at end Jun 2012, there were about 5.3 million people in Singapore (http://news.asiaone.com/News/Latest%2BNews/Singapore/Story/A1Story20120930-374623.html). Hence, to accommodate the increase in population of about 700,000 residents, more dwelling units (including private properties and HDB flats) would definitely be needed.

So exactly how many more dwelling units are needed? According to the Department of Statistics, the average household size in 2011 is 3.5 (http://www.singstat.gov.sg/stats/keyind.html). If the average household size trend remains unchanged, to support a population of 6 million, the total number of dwelling units is about 1.71 million.

Based on URA, the total number of available private properties in 2012Q2 is 273,050. In terms of public flats, the total number of flats under HDB's management is 901,971 (this figure was extracted from HDB's latest annual report and is correct as at 31 Mar 2011). Collectively, the total number of dwelling units works out to be about 1.18million.

When you put all the figures together, this means that Singapore is still short of about 530,000 dwelling units to support the population target of 6 million. Looking at the figures, it would not be too wrong to conclude that mid- to long-term demand for residential properties exists, provided that the population target of 6 million remains unchanged.

Is it justifiable to pay high prices for properties then?

While we have established that there is mid- to long-term demand, does it mean that it makes sense for buyers to pay high prices for properties?

During my seminars, I occasionally come across some investors who have paid more than $3,000psf for their properties. While they acknowledge that paying $3000psf or more for a property (especially if it is a shoebox unit) is pricey, they justify their decision by saying that property prices would go up in the long run and there would eventually be a buyer who is prepared to pay more for the unit. We have a slightly different view…

Intuitively, we know that there are more buyers with a budget of $500,000 as compared to those with that of $5million. As the asking price of a property increases, the number of people who can afford it becomes lesser. We would expect that this would apply to unit prices as well, and there would be more buyers (and transactions) at lower $psf as compared to one that has a higher $psf. From our research, we found this to be the case.

By analyzing all the past transactions data from 2009 to Aug 2012, we can tell that unit prices between $700psf and $900psf had the most transactions — with more than 30,000 transactions in total (see Figure 1). The number of transactions (i.e. frequency) drops significantly as the $psf increases. Beyond $3000psf, there were only 560 transactions or less than 0.5% of the total transacted volume from 2009 to Aug 2012.

Figure 1: Frequency distribution according to $psf category

Source: URA and Ascendant Assets Pte Ltd

From this figure, it clearly shows what the market (made up of the collective sentiments of individual buyers) is prepared to pay. It also tells us that beyond a certain price, the market would deem it unsustainable and owners would have a hard time finding buyers.

What I have shared is just the tip of the iceberg and there are definitely more factors to consider. However, if you understand the principles behind this simple analysis, by extension, this could be done for individual developments where investors can tell whether a unit is reasonably or unreasonably priced.

Conclusion

To summarise, it is important for investors and potential homebuyers to note that even though the mid- to long-term property demand is expected to be strong, they must be careful and not overpay for their properties. The $psf distribution chart shows that beyond a certain price, the market would deem it as unsustainable and it would be very hard to find buyers.

Investors and buyers should also be mindful that the global economic outlook is still unstable. While we have not been hearing much negative news on the Euro economic crisis and US's massive debt, these issues are still there and could tip the world back into economic recession.

As a parting shot, perhaps we should heed Minister Khaw Boon Wan's comments when he said that Singaporeans should "buy within their means" (http://www.channelnewsasia.com/stories/singaporelocalnews/view/1218082/1/.html). By not over stretching yourselves and overpaying for a property, you can rest easy knowing that even if a global recession were to hit, you would be able to eventually ride it through.

Mr Getty Goh is the director of Ascendant Assets Pte Ltd, a boutique real estate research consultancy. He has a Masters in Real Estate and a Bachelors in Building from the National University of Singapore. He conducts frequent talks on the topic of property investing. For more information, please visit www.BuyByeProperty.com.