Tuesday, August 12, 2008

The Singapore Property Market: Personal Take I

In this post, I am going to give my two cents on the Singapore property market. As with people giving their two cents, usually it is worth about one cent, esp when people try to give their two cents in some arena where another 10,000 people already gave their answers to 6 million dollar questions. So always do your own analysis and learn to be an independent thinker. I think that should be everybody's goal and that means also you shouldn't be reading the rest of this post. Hehe.

But read lah, just for entertainment lor.

So back to the Singapore property market, I belong to the bearish camp, and the following would be my rationale:

Lets start with today's $1,000 psf, a sort of low benchmark for ppty in some prime locations. But we have to start somewhere, so let's just use $1,000 psf. This means a 1,000 sqf condo will cost $1mn. In order to justify $1mn on the property, I would say that the rental yield needs to be 5%.

Actually in the industry pple use 4% and they call this the cap rate, but I try to be conservative here. You can also think of this as assuming that the PER for the property is 20x, which will give an earnings yield of 5%.

As you can see, PER of 20x is not cheap at all, but if we use a lower PER or higher yield, in will only further prove my point: the property market has gotten too expensive. So let's just stick to this 5% yield.

With the yield at 5% it means that the property priced at $1mn should fetch you $50k rental per yr if you rent it out. This works out to be $4,000 plus per mth. The 90th percentile household salary in Singapore is $12,000, so basically only 10% of Singaporean household can afford to rent this place, assuming that they are willing to fork out 33% their household salary on rental.

Ok most pple won't, or rather couldn't, bcos they spend like 90% of their salary. Esp for Singaporeans, we hate to fork out cash for mortgage. And it is impossible to use just CPF to pay for a $1mn mortgage. Well the point here is that this property cannot be rented out easily to Singaporean households or foreign workers earning less than $12,000 per mth.

Link to Singaporean household income

Stay tuned for Part 2!
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