Saturday, June 27, 2015

Property Thoughts June 2015

This piece from AK got me thinking about property again. AK highlights the oncoming supply of units as well as the forecast of increased vacancy rates. As usual, I think his thoughts are very balanced and he errs to the side of caution by citing the Rule of 15. I personally think that the Rule of 15 is not very possible in Singapore since the Singapore real estate market is really a very rare one, especially when compared to other cities in the world. However, I think it is always more conservative to build your model with these kinds of margins of safety, so that's a good thing.

I read this piece by BNP Paribas about the Singapore property market recent as well. I personally don't really like reading secondary information (ie, not source data), but sometimes I am intrigued by certain topics and I don't have the time to look at the source data and come up with my own conclusions. I felt that it is very close to my take of the property market, with similar reasons such as the government policies and supply. I really like their analysis of price-to-income.

I think the 2 biggest factors is housing supply and also rental demand.

(Source: AK, URA)

As AK has pointed out, lots of supply will be coming on into the market. Ceteris paribus, a supply increase reduces prices, no brainer here. Of course now we need to look at demand.


Personally, I think the only source of rental demand is for foreigners. I couldn't name you 3 Singaporeans I know that rent a place if my life depended on it. So, foreigners make up the rental demand, yet the "populist" view held by most Singaporeans is that there should be less foreigners. I don't get it - you want to rent out your place, but you don't want renters in your country? That blatant and absurd hypocrisy aside, BNP shows how foreigner population at least correlates to property prices.


So, increase supply from new houses entering the market and reduced demand from foreigners. Add 1 + 1 and you should get 2. Vacancy rates seem like a good proxy for property prices since it incorporates both supply and demand.

Nostramoney made a prediction of a property price correction in Q4 2015 to H1 2016 and I would be rather happy if that does materialize. I am intending to look for a place so that I can move out and start my own independent adult life soon. Nothing fancy, probably a resale 1 room leasehold private property. 

This is of course assuming that property prices plunge low enough that my downpayment can cover 20% of the property price. However, unlike most people that have a lot of pride and believe in paying for everything themselves, I am willing to ask my parents for a loan (not a gift) to make up for the shortfall if I can't make the downpayment amount.

This could be simply in the form of a normal home loan but from my parents, where my parents become my "second shadow bank", charging me an interest in line with the market, but of course without a mortgage banker taking a piece out of our pie.

Alternatively, I was inspired by LP and his bonds for his parents, I could raise money for myself by offering something similar to my parents and maybe my siblings if they are interested. I think this would be more attractive to them actually. It would also feel less like a loan to them, and more like an investment.

Both of these ways would artificially increases the amount of leverage I am using, which is risky.

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