By Mr. Propwise

Sales of residential property by developers surged in February to exceed even those during the 2007 and 2009 booms. The interesting (and perhaps worrying) aspect is that the sales were largely driven by sales of Executive Condominiums (ECs) and mass market condos. In my opinion, this increases the risk of further Government action to clamp down on the still buoyant investment demand.

Developers sold a total of 3,138 homes (including ECs) in February, an increase of 51% on a month-on-month basis and 156% on a year-on-year basis. Total private residential sales (excluding ECs) was 2,413 units, an increase of 29% on a month-on-month basis and 119% on a year-on-year basis. EC sales were the standout, selling 725 units, which was an increase of 254% on a month-on-month basis and 471% on a year-on-year basis! In fact, three of the top ten selling projects were ECs: The Rainforest, Trilliant and Twin Waterfalls.

Some might argue that this high growth is due to the Chinese New Year (CNY) effect, as CNY fell in February in 2011 versus January this year. But even if we combine the first two months of the year in 2012 and compare that with 2011, new home sales (excluding ECs) were still up 85%. Furthermore, most of the sales (81%) came from the Outside Central Region (OCR), which suggest that mass market sales are driving the market.

Increased Risk of Further Government Measures

Despite the implementation of the Additional Buyer Stamp Duty (ABSD) in December 2011, which I thought was harsh, new home sales have powered ahead. The worrying aspect is that the demand has been mainly driven by the mass market segment, while the luxury segment has remained subdued as international buyers have stayed away due both to the ABSD and concerns about the global economic environment.

The strength and bullishness of mass market demand could increase concern by the Government that middle-income investors (and especially first and/or second time Singaporean home buyers) are still rushing like lemmings into the property market, despite the uncertainty in the markets and the Government’s own efforts to clamp down on excessive investment demand. This will then increase the risk that additional measures will be implemented to further cool the property market.

On a more philosophical note, I believe that the root cause of this buoyant investment demand is the low interest rate environment. When real interest rates (nominal interest rates minus inflation) are negative, savers are being penalized whereas borrowers get the benefit of cheap funds (or are even paid to borrow!).

To put this in more concrete terms, banks are paying close to 0% on deposits and so the real purchasing power of your savings is being constantly eroded by inflation. In this situation, anything that has positive yield looks attractive as an investment. Property looks doubly attractive because it is a real asset and is believed to be a good hedge against inflation.

But before you rush out to buy a property keep in mind that the low interest rate environment will not last forever and what seems like a good idea in the short term might turn out to be a bad idea in the longer term. For example, if we go back to the first half of 2008, inflation (as measured by the Consumer Price Index) was running at 7-8%, and we could have made very similar arguments as the above on why property looked like a good investment. But anyone who had bought then would have been caught by the Global Financial Crisis when property prices dropped by 25% (as measured by the Property Price Index).

In times of crisis, cash is king, so make sure you have an emergency fund to help you get through the tough times before you jump into a property!

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