Saturday, January 12, 2013

Sky Habitat's Crash Landing - Part 2

This is a continuation of the last post talking about Singapore property market's imminent crash. I wrote most of what is below before the additional cooling measures were announced. Now that foreigners, and even Singaporeans are slapped with additional stamp duties and smaller possible mortgage loans, Sky Habitat should crash faster.

So we can now see that supply should outstrip demand and Economics 101 tells us that prices have to fall. But wait, there are all these global rich people that will simply buy up Singapore right? The Chinese super rich love Singapoore. So do the Indian billionaires and Indonesian tai-tais. Not to mention Singapore's own rich people. How can Singapore property fall?

This has to be my favourite argument (and my favourite counter argument). Logically, it is hard to debunk. Yes Singapore has always been a safe haven and has attracted a lot of money. In fact, it might be partly due to this that we became the nation with the most no. of millionaire households per population. Of course, a lot of born and bred Singaporean have also worked hard and made a lot of money (like top civil servants and ministers, finance people, top executives and readers of this blog).

So they will simply buy if prices fall by just a bit. Now how can price fall then? Waiting for prices to fall is a futile game.

Sadly, things do not work this way in reality.

When prices fall, liquidity dries up. Rich people do not simply buy when prices fall. If so, they would have continued buying Sky Habitat after its Phase 1 successful launch which sold 80%. It's now 25% below launch price, shouldn't all the Bishan rich go cheong (dash) into the showroom and write as many checks as they can? If so, why is Sky Habitat now 70% unsold and Capitaland trying all ways and means to get people to buy?

This pic is taken using the URA app showing Sky Habitat's price decline.

Humans are driven by greed and fear. When prices are rising, greed prompts people to buy, afraid of missing the train. When prices plunge, fear takes over. People, rich or poor, simply stop buying. There was no less rich people when Tokyo prices collapse in 1990, or in US after Lehman, or in Shanghai last year (2011). Florida beachfront property plunged 50% and is now much cheaper than Sentosa. Why didn't the US billionaires buy up Florida? Why didn't the Chinese super rich buy and support Shanghai property prices last year?

Rich people are also humans and hence experience greed and fear. In the plunge, fear takes over and only astute investors dare to buy, and only when value appears (ie price is much less than intrinsic value).

Ultimately, property is an investment and we should apply the value philosophy. But more on this later. Now we look at the low interest rate argument.

It is true that interest rate should remain low for some time. Singapore's interest rate is pegged to that of our trading partners as our central bank (Monetary Authority of Singapore or MAS) had decided to use exchange rate to manage our monetary policy some time back. This has to do with interest rate parity and the impossible trinity, interested parties can find out more on Google. The conclusion is: as long as global interest rates remain low, Singapore's mortgage rate should not increase.

So, everyone can afford their mortgages, and will be enticed to buy more property right? How can prices fall?

Yes, this argument stands and on its own there is no way to debunk it. If everything is as per normal, ie prices are stable, there is no disruption, the world continues revolving. This was what happened before sub-prime and Lehman. US property prices kept rising, mortgages were safe, people had jobs and everything was fine. However as prices continue to rise and efforts were continously being made to make sure the party can go on, the market will increasingly become unstable such that any small shock will cause the whole house of cards to collapse. (Well some experts do think that the global economy with all its intricate links supported by enormous debt is analogous to a house of cards.)

Back to Sky Habitat, so now that it has fallen 25%, there could be a few owners that were not prepared for such fall. They wanted to flip before TOP (forgot what the acronym stands for but basically it means when the property is ready for stay), now they have sell, which will exacerbate the price fall. At the banks, some mortgage had valuation there was at $1,700psf. Now they have to revalue the property and ask owners to top up 25% (which could be $500k). Some bankers might choose not to, bcos they know the owners cannot pay. But even if one banker insists on a pay up, then the owner might be forced to sell. So when we are at the top, any small shock will cause things to collapse. Not to mention, the Government just came out with major bazooka cooling measures to stop the frenzy.

So the interest rate can and should remain low. But when the system is especially fragile, it does not take much to cause a collapse. The US sub-prime and Lehman crisis didn't come about with the Fed doing interest rate hike. In fact, it came out of the blue. Things just fall apart, like the balloon that is being pumped air will just reach a point that it will simply burst.

We can gauge Singapore's property market nearing that breaking point when developers have to privatize themselves to avoid paying taxes (read SC Global), 50 year mortgages and HDB Minister coming out to warn EC developers not to get ahead of themselves. We are not far and may have hit that point last night.

Next, we look at valuation.

The full series:
Part 1
Part 2
Part 3
Part 4


  1. T researched on sky habitat's transaction price from launch to end of dec 2012. I do not see that the prices had fallen by 25% as you mentioned in this post. could you explain how you get the figures?

  2. Hi Anon, thanks for your comment, I have added a screen shot from the URA app showing Sky Habitat"s recent transactions. Yeah, I took some liberty with the no.s. The median shows a teens kind of decline.

    But if you browse through the transactions, you do find similar units transacted near 25% decline, one example at 11-15 floor $1777psf (May 2012) vs another 11-15 floor at $1450psf (Nov 2012).

    It is too difficult to capture this screen shot so I shall leave the evidence up till here.

    In defense, I would just like to add that investment is an art and we should not treat things as science where accuracy is needed to 2 significant figures.

    In art, what is important is the idea, the big picture and the message. The big message here is Singapore property has hit a brick wall.

    Hope this helps!

  3. Now Sky Habitat really fell! They cut the prices by another 15%! The early buyers should sue Capitaland!