Singapore Real Estate Menopause

In a truly bizarre twist whilst reading about this Jurong East condo, J Gateway, sell out and having conversation with some old friends about their impending male menopause, I came to a personal conclusion that the Singapore real estate market is approaching its menopausal years.

JURONG EAST CONDO ALMOST SOLD OUT ON LAUNCH DAY (Asiaone News)

“Units were sold at an average of $1,480 per sq ft (psf), said MCL Land chief executive Koh Teck Chuan. The one-bedders went for about $1,778 psf, beating initial expectations of $1,650 psf, while four-bedders were sold at $1,400 psf. ”

I have been told that most of the buyers were single name buyers (to avoid the extra tax and stamp duty) with some whole families buying one each and their blind confidence is laudable.

And true to my post last week about the Singapore Housing and the 2 million dollar sweet spot, most of the units were under the 2 million dollar mark.

The property euphoria in the past decade can be attributed to 1. a growing population, 2. growing incomes and 3. LOW interest rates.

Take a look at the graph below.

I drew the red arrow to illustrate the gapping of the URA residential index (at a historic high) vs 6M interest rates (near rock bottom).

Lets do some math here.

A Jurong East unit, say 900 sqft 2br 1600 psf = $1.44m.

Taking an 80% loan for 25 years, your monthly mortgage payments would be about $5-6k.

Agent fees are 1 month per annum, property tax is 10% of annual value, MC fees etc will give you say 10 mths a year in rental.

The breakeven rental for the unit would be 7k ? That is someone’s entire take home pay.

Evaluating returns. Lets assume a more credible rent of $4k. 4K times 10 months gives you 40k per annum which works out to be 2.78% per annum, just about our 10Y risk free rate.

I am sure there is a different way of looking at this.

The buyers of Jurong are probably thinking. Whatever rental is good because it means the house comes cheaper and it is a form of savings.

There are 2 risks going ahead in the business cycle.

1. economic slowdown or mini crisis (say Europe or China), banks downsize and since Singapore’s rental market is still specifically more leveraged to the financial sector (mass market homes less so, but there is a trickle down effect), if Orchard Road and CBD rentals collapse, Jurong will be affected.

2. interest rate rise which looks probable after 5 years of near zero.

My question is this : How much will property price come off by for a 1% up move in interest rates ? This is entirely plausible because our mortgage rates are still about 1% and moving on to a 2% handle is not an impossible scenario. It will really start to burn when it hits 3% bringing about the dreaded margin calls on those loans that are leveraged to the hilt (= sub prime foreclosure scenario).

Using rough math, 1% for 25 years = 25% more you will be paying (the amount should be less due to amortisation effect), on 80% leverage, so we have about 20% ! Unless you have a wage hike of 20% or a rental hike of 20%, the property prices should come off by 20% to equalise ?

Of course this is not true. We have the 6.9 million population coming soon and our wages are going up, despite Singapore having the 3rd highest GDP per capita in the world and nobody is going to move to Iskandar, which is cheaper and just a 10 minute drive away from Jurong. And I am hearing, air quality is supposedly better too. Some one also pointed out the cross country drive to Changi airport compared to Iskandar’s proximity to their airport (name slipped me).

Let us take a minute to remember that the global financial crisis was brought about by this asset called sub prime mortgages i.e. mortgages that were falling into arrears. It is all property related and as such, the property market has become the sacred cows in all countries where leaders are elected based on their sympathy to the cause of the sacred cow.

Most Fed actions have been to save the US jobs and own the US houses for the common man.

And so we have a menopause here not a bubble ! And I do not want to be sued for anti establishment talk.

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