By Mr. Propwise

By now you’ve read the scary headlines – new home sales in February “plunged” by 65% on a month-on-month basis to 708 units (excluding Executive Condominiums), versus the 2,013 units sold in January. Sounds like a big drop doesn’t it?

Looking more closely at February sales

But when you start drilling down deeper into the numbers, a somewhat different picture emerges.

For one, developers only launched 261 units in February. In other words, they sold 271 percent more units than they launched. Otherwise known as the Developer Monthly Sell-Through Rate, the ratio of units developers sold versus what they launched is a gauge of how quickly developers are selling their launches and of how hot the market is. You can see this statistic tracked over time in the chart below (courtesy of PropertyMarketInsights.com).

Figure 1 – Developer Monthly Sell-Through Rate till February 2013 (from PropertyMarketInsights.com)

From this perspective, things don’t look so gloomy (at least from the developers’ perspective). Likely due to the combination of the Chinese New Year holidays and the seventh round of cooling measures announced by the government in January, developers held back on their launches in February, not wanting to be the “victims” of poor sentiment.

But yet they managed to sell many more units than they launched. A Sell-Through Rate of above 100 percent means that developers are de-stocking their inventory (i.e. have fewer units in total to sell), which will likely lead them to be more bullish. Indeed, if we look at developer inventory levels, they have fallen for nine months in a row to 4,878 units from a peak of 7,312 units in May 2012.

Figure 2 – Developer Inventory Levels till February 2013 (from PropertyMarketInsights.com)

Imagine you are a developer. Despite all the scary policy noise the government is making, your units are still selling like hotcakes, you don’t have that much debt on your balance sheet, and the number of units you have left to sell (i.e. your inventory) is falling to relatively low levels. You wouldn’t feel too bearish on the market, would you? In fact, you might even want to go out and bid and pay a fairly high price for a new piece of land so you will have more property to sell.

Yet a chill has descended on the resale market

However if we look at the resale market, things are indeed gloomy. As an aside, I believe the resale market is mainly driven by buyer sentiment, whereas the primary market can often be powered along in a different direction by the sales and marketing machines of developers and property agents, using various gimmicks (e.g. discounts, smaller unit sizes etc) and hype (e.g. playing up the 6.9 million population target etc) to create a buying frenzy among unsuspecting buyers.

Resale transactions, which do not benefit from this, were down an estimated 68% in February. Of course, this fall is exacerbated by the Chinese New Year holiday and shorter month of February.

But there’s no doubt a chill has descended on the resale market, and is not likely to go away anytime soon. Egged on by government pronouncements of how prices must stop going up, buyers’ expectations for a correction have increased, and the “bid-ask spread” between what sellers want to sell for and what buyers are willing to pay has widened.

I’ve been looking up asking prices of some projects and they’re still sky high, 10 to 15 percent above the last transacted prices. Perhaps Cyprus and the potential knock-on effects might help to moderate seller expectations?

March Madness and the heavy hand of the government

As of now it looks like new home sales will rebound strongly in March. Anecdotally, just from strong sales at the launches of projects like Sennett Residences, d’Nest and Urban Vista, March numbers will easily surpass February by a large margin. These projects mainly appeal to local mass market buyers and investors, where demand for property is still strong.

The fundamental cause of the current continued bullishness in the market is the sustained low interest rate environment. Versus close to zero percent interest in the bank, the promise of high rental yields in the range of four percent for the one to two bedroom units in these projects has proved too alluring for people who are looking to put their cash to work.

It remains to be seen whether this siren song of attractive yields sung by the developers and property agents will lure unsuspecting buyers to crash upon the rocks of financial hardship if and when the market corrects.

Meanwhile, given how strongly the government has come out to talk down the property market since the January measures (including the Budget 2013 measures to discourage high end property investment), and have thus put their credibility on the line to show that they have control over the situation, the continuing bullishness in the sector will be a source of embarrassment for them. Watch out for more measures – rocky coasts ahead!

By Mr. Propwise, founder of Propwise.sg, a Chartered Financial Analyst and resident real estate analyst at PropertyMarketInsights.com, a site to help property owners and investors make profitable decisions in uncertain times. Click here to learn more

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