Old Age Still an Advantage in Real Estate
As is true with any market, the property market is not monolithic.
In Singapore, it consists of many different market segments including HDB resale, Built-to-Orders, private condos, and landed homes.
Within each market segment, specific areas and homes perform differently and have reacted to the Cooling Measures in different ways.
According to SRX Property, the private condo market is down 6.2% since its peak in prices in January 2014.
In contrast, Ardmore Park, for example, is down 23% for about the same period. The reason for the difference in price depreciation is that the supply and demand characteristics in Ardmore Park’s pocket of the market are different from that of the national condo market overall.
In Ardmore Park’s case, several new projects on the same street have been built in the recent years causing supply to increase for luxury apartments just as the Cooling Measures reduced demand. As a result, Ardmore Park owners have had to sell at a significant discount to the overall condo market.
January 2014 is an important date in Singapore real estate history because this was the turning point in which the Total Debt Servicing Ratio (TDSR) was able to stop the prices of the overall private condo market from increasing.
But not all private condos have seen a decline in price since then.
According to SRX Property, 85% of private condos with statistically significant transactions from January 2014 to March 2015 have seen a decline in price per square foot (PSF).
This means 15% of private condos have actually experienced an increase in PSF.
So what have these private condos done right?
The Millennials are going to hate the answer.
The reason why these condos outperformed the market has to do with their maturity and stability - traits that tend to be boring to Millennials.
The private condos that shot up in price prior to TDSR tended to be hot, new projects. There was a buzz surrounding them. In some cases, in their effort to get in on the next new, new thing, buyers and investors bid up prices above the fundamental values of the projects and their neighbourhood.
Each neighbourhood has a fundamental price for similar projects in the area.
Sometimes prices get out of whack. For example, a buzz around a project, especially a new project, pushes prices above the area’s fundamental value. Other times, the market can forget about some projects, especially older ones, and those projects’ units trade below the fundamental value.
Over time, though, the price of similar projects tends to equalize. This means the overpriced homes will decline while the underpriced homes will increase until the neighbourhood for similar projects has achieved equilibrium.
Using information and technology, a smart real estate agent can identify areas in which projects are in the process of equalizing and take advantage of the opportunities presented by this phenomenon.
For example, take a look at the Simei neighborhood. Melville Park’s PSF has increased 4.2% since TDSR. It is the only project in the neighborhood that has increased in value during this period, yet it is the oldest in its peer group with a TOP in 1996 and has the lowest PSF, by far.
Melville Park fits the old real estate adage that says buy the least expensive home in the most expensive neighbourhood you can afford. The fact that Melville Park’s PSF is significantly below that of its young neighbours suggests that it has room to grow even while the Cooling Measures are putting downward pressure on the overall market for private condos.
What we noticed about the private condos that have appreciated since TDSR is that they tended to be older, 99-year leasehold, and have low PSFs relative to their peer group.
Sorry Millennials, during the Cooling Measures, it looks like the old guys are having the last laugh.