| How to deal with the impending recession
In view of the impending recession, consumers should equip themselves and be prepared for the impact which cou
ld see some of the rich upper class falling straight into the bankruptcy list, starting with some of the top guns in many of the world's leading investment banks, hedge funds, insurance companies and other private financial institutions which were just a year ago, living the high life.
Over the past six years or so, the housing inflation had also inflated the values of many companies, such as banks and major institutions, and emboldened many property investors, including Singapore. In short, the economy bubble was inflated out of proportion over the past years and it is still in the process of being put down to its correct size. In the process, spending will be curtailed, resulting in an "obese" global economy.
Currently, the market is at the quiet part of the cycle just before the crash. All parties need to be prepared for widespread poverty, even in the world leading economy such as the United States and certain parts of Europe.
What does that mean to the property market in Singapore?
It is noteworthy that while prices may fall by 5% to 10% in the next six months, the transaction volume is a different matter. As far as property transactions (including sales and rentals) are concerned, there are many signs that point to an active year ahead, as investors and home owners alike adjust to their new circumstances.
• More Sub-sales on the card
The record 18,000 sales of new home units achieved in 2007 and the 'not-too-bad' 11,147 sales of new home units in 2006 will combine to release thousands of completed new condos into the property market, starting from the early part of 2009 onwards.
More than 15,000 condo units are slated to be completed from the first quarter of 2009 onwards, with more than 8,000 units in the prime districts such as districts 9, 10 and 11; and another 4,400 units in the East Coast areas of districts 15 and 16. The rest of the thousands of new condo units will be scattered around the outlaying areas.
With banks tightening credit control, some of the property buyers who had purchased the properties on Deferred Payment Scheme might not be able to secure the financing and will have to dispose of the property in the sub-sale market.
• More down-grading from condos to HDB flats
There may be more instances of condo owners wanting to downgrade to public flats due to the massive increase in costs of living in a condominium. With the new price hike in electrical tariffs from October 1, 2008 where average households will pay 21% more in utility bills, more 'middle income' households with a gross household income of between S$5,000 and S$10,000 with more than two 'financially dependent' children may have to adjust their lifestyle and spending habits – if they are living in a condominium.
This means that the HDB resale flat segment may experience a 'mini-boom' as it will become a 'buffer zone' in times of great 'economic adjustment'. I expect younger 5-room flats to experience an increase in activities since the 'middle income' may not be comfortable to relocate into an old heartland area. Newer HDB precincts may offer a lifestyle concept that appeals more to the middle income group. In other words, I expect the newer HDB precinct to become the growth area in the next nine months to one-and-a-half year.
• Cheaper prices lower risks
Despite the fact that the US subprime mortgage crisis had already been making regular headlines in the local newspapers, the first half of the year saw an increase in buying activities of mass market condominiums in the outlaying areas.
The Best Selling Condo list has been dominated by transactions in Districts 5, 15, 16, 22 and 23 where the unit floor rates (i.e. per square feet price) hovered from S$700 to S$1,200 for District 15 condos, and as low as between S$400 and S$600 for condos in Districts 22 and 23.
While the new home segment may take a hit in sales volume due to developer's pricing strategy, the sub-sale market is more responsive to the basic market forces of 'demand and supply'. As such, it is not surprising to see sub-sellers pricing their units on hand for 'cut-throat' prices that are lower than the developer's listed prices.
Property prices to drop by 20%?
Some wishful buyers are hankering for the prices of their coveted properties to fall by more than 20% because of the looming global economic recession.
But the numbers do not add up to such a drastic drop in houses prices in Singapore – for at least the next six months. Here are some of the reasons why:
The rich lists have grown
• Ultra rich – US$30 million per person
The ultra rich are individuals with investible assets of at least US$30 million. In Singapore, there are 1,000 such individuals with total wealth of US$159 billion.
Across the Asia-Pacific region, the number of this category of HNWI rose 16.4% to 20,400 last year. The number may drop back a little but as Asia is not as badly hit as elsewhere in the world, the rich list is not expect to shrink by much.
• The rich – US$1 million in investible asset per person
There are now 77,000 such wealthy Singaporeans, representing a growth of 15.3% annually, or 1.7% of the population. The total combined wealth of such individual Singaporeans grew by 18.4% to US$380 billion last year.
• Emerging rich – US$750k to US$1 million in investible assets per person
Next level down the rung, the number of emerging high net worth individuals in Singapore also grew by 15% to 24,000 in 2007. Altogether, these people have a combined wealth of US$20 billion.
No doubt the asset growth of the ultra-rich in the region as well as in Singapore will slow down, it will not suddenly disappear. It may contract by 10% to 20% but the money need to be deployed somewhere for good returns, and the people working for the rich need to be put up somewhere when they trot the globe for investment opportunities. Granted, there will be some bad days at the office where there will be no sales but there is no reason for the property market to suddenly stop functioning altogether – there will be people jostling to get out and others trying to get in. The basic economics continue to function.
• Singaporeans are all 'house proud'
A recent report by Merrill Lynch and Capgemini found that the Singaporean high net worth individuals (HNWI) have an average net worth of US$4.9 million, and it confirms that Singaporeans HNWI, regardless of their wealth, are indeed very 'house-proud'.
They put 25% of their wealth in real estate with the rest in alternative investments like structured products, hedge funds and currency.
Though the same report also stated that the Asian high net worth individuals are likely to turn to fixed-income securities which are less volatile in the near future, there is nothing to stop them from buying into Orchard Road if the investment returns become attractive.
The report points out that in the longer term, the region's wealth will continue to expand at 7.9% annually - higher than the 7.7% global rate.
Singapore population has grown
According to National Population Secretariat, Singapore now has 4.84 million people living in the island city. Out of whom 1.2 million are foreigners working and living here.
Among the 1.2 million non-residents, 757,000 of them are on work permits, 143,000 on employment or S passes, and 85,000 on student passes, according to the Ministry of Manpower. The Ministry also said that the number of non-residents has been rising significantly since 2004.
Likewise, the number of permanent residents (PRs) rose 6.5% this year to 478,200. This means that there are people to fill those condos, and new flats that are coming onto the property market later on.
The size of the population also underpins the growth in real estate prices, including rental prices. Barring any more financial disasters which result in these 1.2 million foreigners being recalled home, there is going to be strong tenant base to provide the cushion for any future correction in rental prices. Or to put it another way, rents will not crash, barring a major disaster – man-made or natural.
Total quantity of residential units
How many houses do we have in Singapore? The statistics are quite reassuring. Let's look at the numbers:
• For public flats, there are about close to 900,000 HDB flats, of which about 30% are available for approved whole-flat subletting.
• For condo and apartments, there are about 180,000, spread over 3,000 private housing projects. This number will increase to around 220,000 by 2011, if all the planned developments are built on schedule, which we now know is unlikely due to delays in legal completion of many huge en bloc sale projects.
• For landed housing units, we have about 68,000 houses, out of which 25,000 are bungalows and the rest are semi-detached and terrace houses.
This means that had the economic bubbles not burst in the United States and Europe, there will be an acute shortage of rental properties in Singapore. This time round, the consequences of the global financial fallout may not be so sinister for Singapore, because barely six months ago this country was still grappling with problems of burgeoning house rents, and lack of places in international schools.
Granted that home rentals will ease and landlords will have to wait for a longer time for an expatriate willing to pay the extortionist's rents, it is not all doom and gloom. At worse, we are going back to the 2006 situation where everything happened within reasons, and where nobody thought we were in an economic recession. The truth is that 2007 had made many people very greedy.
Taken together, we might have a difficult next few months when the entire global financial systems go through fundamental restructuring and major austerity drive, but the mid- to long-term prospect looks promising, especially for Singapore.
By Sam Gian – Independent Real Estate Sales Trainer
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