Rice and Real Estate – Why today’s property buyers such febrile bunch?

There are unavoidable, short to long-term economic forces that are about to deal a devastating blow to our real estate market, our economy and our society.

Yet, throughout history, the market continues its existence of naïve buyers who seem ignorant of what’s already happening or what’s going to happen.

The “febrile” actions of buyers for certain projects in 2016:

The latest figures show 8% fall in the private residential market since the peak of 2013. The bottom line is the property market isn’t doing too badly though. But things are going to get worse.

I’m completely baffled why buyers are so willingly eager to ballot and pay for overvalued real estate prices even today.

Forest Woods

It was one of the bestselling private condominium projects in 2016. At its launch during the weekend of Oct 8 and 9, Forest Woods saw 337 units (65%) sold by balloting at an average price of $1,400 psf. As at mid-December, the tally was 380 units (73%).

The crowd on balloting day at Forest Woods, during which 337 units were snapped up

Forest Woods was City Development’s (CDL) top-selling project in October, with 337 out of 519 units sold over its launch weekend of Oct 8 and 9.

The Venue Residences (Mixed Development)

70% of the 266 units have been sold, while 60% of the 28 units at The Venue Shoppes have been taken up

To date, 70% of the residential units at The Venue have been taken up at an average price of $1,400 psf, while 60% of the strata commercial units have been sold, with the average price hovering at $5,400 psf.

Gramercy Park

A freehold property in district 10, it was soft launched with an initial release of 40 units in May. The units, priced at an average of $2,600 psf, were quickly snapped up, mainly by Singaporeans. To date, 45 of the 50 units released have been sold.

CDL has sold 45 of the 50 units launched, at an average price of $2,600 psf.

“The buyers recognise that $2,600 psf for a prime freehold project on Grange Road represents great value,” says Samuel Eyo, managing director of Singapore Christie’s International Real Estate.

“In the past, projects launched in the area crossed $3,000 psf. So buyers of Gramercy Park today can expect to see future capital upside.”

 ”Febrile” Price versus “Recession” Price

Expected future capital upside? I challenge Samuel Eyo to put his statement as a guarantee in the buyer’s sales and purchase agreement.

With current developments and many economic restrictions, I don’t see how property prices in prime areas will see prices ever going way beyond $3,000 psf in near or far future.

Even if prices do rise optimistically from $2,600 psf to $3,000 psf, say in 10 years, the annualised compounded return is only 1.4%. Nothing to shout about. The buyer will sleep better placing his bet in a bank with higher deposit interests or even his CPF accounts.

Today’s price-to-square-foot prices (psf) are relative only to psychological market conditions. However, it does not mean prices are relative to actual fundamentals and real intrinsic value.  

True enough, the market has seen “discount” from peak 2013. But this “discount” still does not justify enough an overly expensive property buying decision.

For buyers known as “collect-a-pay-check-crowd”, their vulnerable position at the bottom of the real estate food chain present them a potentially catastrophic financial crisis when the market goes further south.

Every asset has a real intrinsic value or base price or “worse-scenario price” attached to it. We are only willingly to pay a certain price to justify its use or future rewards. Unless it’s totally worthless, it’s nearly impossible for something to cost less than the base price or even nothing.

Rice and Real Estate

Take a bag of 5kg rice for example.

It’s is an essential food item meant for daily consumption especially in Asia. Without it, we will have massive famine like Mao Tse Tung’s Cultural Revolution of the 1960s.

Today’s average price for a 5kg bag of rice is $6. The price may go up or down slightly depending on supply and demand factors.

There are of course many other intricate factors that will determine its final price to consumers. But that’s beyond this topic. I rather like to keep this metaphor simple for our current real estate market.

Will price of rice fall to $2.50 or even $0?

Highly impossible. Why?

The mechanics of economic demand and supply doesn’t allow it. There will be more than enough people like you and me who wants to consume rice daily to prevent such drastic fall and thus support a minimum base price.

Will rice price ever fall to $5 per 5kg bag (recession price)?

Well, that’s an economic possibility perhaps due to an oversupply and other dire factors beyond simple economics.

Will rice price rise to $10 (febrile price), a jump increase of more than 60% from original $6 within three short years?

Sure, if a sudden unprecedented overnight demand from seven billion rice consumers allow it to happen. Opportunistic rice sellers will take advantage to substantially raise rice prices for more profits.

The counter-argument is a seller’s cost may also have gone up to justify the price increase dollar for dollar. Fair enough. Did seller’s costs jump 60% within a short three-year period? The definitive answer is no. (Unless another megalomania Mao comes along)

Eventually, market demand slows down because of government interventions. Rice sellers are then forced to accept slightly lower profit margins – still profitable but less. The price of rice thus fall to $9.20 over a period – a measly 8% “discount” over three years.

Unscrupulous rice sellers thus walked away with profits (albeit lesser) in their pockets. Their exalted marketing campaigns have served their personal agendas. Even costs may have gone up somewhat, gross profit margins are still in the 15-20% range.

And what’s left for middle-class buyers?

Scraps and Pyrrhic returns if any.

A “Want” or a “Need”?

Rice is an essential commodity depended on by more than a billion humans on the planet for survival. Prices will rise accordingly with a growing world population for its needed consumption.

Unlike rice, private real estate in Singapore is not an essential commodity for survival. It’s purely private consumption spending on the ostentatious scale. It’s a want, never a need.

In Singapore, a huge 75% of the population resides in subsidised government housing. This percentage is expected to rise as the supply of government flats increase over the years.

Friendly government housing policies already in place for the “enmeshed” middle-class will further add to available flats. A good recent example is the new policy allowing singles to buy new BTO flats.

Our population is expected to age and decrease from 2025 onwards. Many will face a substantial lack of retirement savings to fund their own retirement in coming years.

In short, a retiree’s strategy will either be “stay put” or “right-size” current HDB flats to release need money, thus placing downward pressure on the demand for “HDB-upgrader-properties”.

Within 20 years from now, the question for many “febrile” private property buyers today, “Who can really afford buying and paying inflated prices for private housing in future?”

Savvy buyers, ask yourself this:

To meet a fair economic advantage to both buyers and sellers, the real intrinsic value of rice (base price in a normal market) is somewhere at the $6 price range (±$1.00).

Thus, are you willingly to fork out $9.20 (after “8% discount) for that bag of rice that in normal times will cost only $6 (±$1.00)?

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About the Author

Gerald Tay Author, entrepreneur, professional investor and loving father, runs with a tongue-in-cheek approach to property investment - and himself. He is widely regarded in the industry as 'The Common-Sense' Investor. Gerald writes with passion and straight-forwardness, disclaiming wild claims and impractical investment strategies behind lies and ignorance pervasive in the property industry for vested interests. His well-known statement, "All I did is to value my investments with science, logic and common sense.'

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