Originally published in Today, this article is posted here with the kind permission of the author Ku Swee Yong (guest contributor), founder of real estate agency International Property Advisor, which provides services to high net worth individuals.

When the latest property measures were unveiled on Jan 13, it took most market watchers by surprise, mainly because we had been reassured several times that the previous rounds of measures announced on Aug 10 had been effective.

Reaction from the local market has been negative but not too severe, as shown in a survey by property blog propwise.sg. Were these new measures necessary? Definitely.

At the macro level, Singapore’s real estate is far from being overleveraged. According to data from the Monetary Authority of Singapore (MAS), as at the end of October last year, total housing loans amounted to $109 billion and the total number of completed private housing units stood at 256,513 units.

This included private residences, from good-class bungalows down to shoebox apartments. Assuming an average value of each unit at $1.1 million, the total value of completed private homes is $282 billion; that is, the loan-to-value ratio is a relatively low 39 per cent islandwide.

However, at the micro-level, pockets of risks exist. Table 1 shows a sampling of the record high prices achieved last year.

Table 1 - Projects outside the city centre

Table 1 - Projects outside the city centre

The Vision was launched in the first quarter of last year and its “higher-than-the-neighbourhood’s” transacted psf prices helped to lift the general valuations in the West Coast. The highest price achieved of the 199 units that were transacted in Q2 last year was $1,266 per sq ft (psf). The average price for The Vision in Q2 2010 was $1,019 psf versus the neighbouring developments Blue Horizon (sharing a common boundary wall with The Vision) at $856 psf and Westcove Condo across the road at $689 psf. The highest price achieved in The Vision is almost double the average price achieved in Westcove Condo that quarter.

The same story unfolded itself across the outskirts throughout 2010: Serangoon, Pasir Panjang, Bukit Panjang, Pasir Ris, Yio Chu Kang, Ang Mo Kio, Yishun and more.

A most recent example is The Lakefront Residences in Jurong West launched in Q4 2010. Of the 167 units transacted, based on the latest Realis data, the highest price achieved was $1,362 psf and the average was $1,074 psf. Just 100m away, the older condominium Lakeholmz, at $681 psf on average, is half of the peak price at The Lakefront Residences (without considering the sizes of apartments, just comparing psf values for the street block). Even if we topped up the 10-year expired lease tenure for Lakeholmz to 99 years and added a generous construction cost of $250 psf, it would be difficult to place a value for a new apartment in that street at above $1,000 psf.

So it would seem Singaporeans value “newness” with a very high premium? Wrong. When we compare the prices of the still-under-construction Caspian (which shares a boundary wall with The Lakefront Residences), at an average of $793 psf in Q4 2010, we see that the newness value is not sufficient to explain the prices achieved at The Lakefront Residences.

Within two to four years, both projects will be delivered to buyers brand new. So why did The Lakefront Residences achieve an average price that is 35-per-cent higher than Caspian’s? I am obliged to add two other factors to justify the premium: The “showflat wow” factor and the “showflat peer pressure” factor.

Pushing up the PPI

With premium prices achieved during property launches at 20- to 50-per-cent higher than neighbouring average psf prices and multiplied by the number of transacted units, it is no wonder that the Private Property Index (PPI) kept rising though 2010.

The PPI rose in Q4 2010 despite August’s cooling measures. It’s a good thing the URA’s overall PPI is weighted so that transactions in a few launch projects do not overly distort the PPI. Otherwise, the rise of the Q4 2010 PPI would not have been a mere 2.7 per cent.

And that led us to the latest round of measures.

Apart from the overall islandwide PPI published by URA, investors can refer to URA’s website for transactions in specific projects and compare prices so as to make better decisions. However, of late, most investors do not seem to be doing their homework and have purchased in large numbers at record high prices in the suburbs across Singapore.

Who might be the next target?

Investors make up one of several constituents in a property transaction. The past few rounds of measures have already hit investors hard enough. In the next set of measures, if any, the other parties who may be targeted are the developers, the sales agents, the mortgage lenders and valuers.

Many investors and analysts have pointed their fingers at foreign investors and their “hot money” causing Singapore’s real estate to overheat.

Yet the new launches that set record-high prices in the suburbs do not attract foreigners as much as they attract Singaporeans. Table 2 shows why we should not blame hot foreign money for bringing on the latest round of measures.

Table 2 - Foreigners only make up a small percentage of buyers at new launches

Table 2 - Foreigners only make up a small percentage of buyers at new launches

On average, about 25 per cent of residential units are purchased by foreigners. These projects listed in the table are clearly well below the national average. Perhaps Singaporeans are the ones pouring hot money into property.

I would rule out targeting developers unless there are issues of misrepresentation. Otherwise, developers do what they do – acquire land, build showflats, and sell homes.

The sales agents have come under the new Council of Estate Agents and are already facing tighter operating parameters. Again, unless there is bad practice or misrepresentation, I do not think they will be the next target.

As for the mortgage lenders, when I made enquiries about loans for investors buying at these record high prices, the answer invariably was: “Oh, valuers matched developer’s selling prices.” Of course, as long as there are valuers who can sign off on a certain value for a property, banks are eager to lend.

How might valuers agree to value a new launch that is priced at 20- to 50-per-cent higher than other transactions in the neighbourhood? One counterargument regularly given to me is: As long as there are transactions in this new launch at this price, the valuers can support valuations at the new highs.

In the example of Caspian above, buyers today would find it difficult to obtain a loan based on $1,000psf valuation. Sellers are also unable to ask for prices above $1,000 psf when prospective buyers are unable to secure loans at that value. However, the same buyer can purchase a smaller unit at the same investment quantum at Lakefront Residences at $1,150 psf with a bank loan attached. I wonder why the discrepancy given that the two properties are side-by-side and both are not completed.

By not taking reference from other similar transactions in the neighbourhood, this means that valuations are justified solely on transacted prices within the new launch itself. Without taking into account the lower values of neighbouring condominiums and the intrinsic land value in the vicinity, this valuation method is a self-fulfilling upward spiral.

Having excluded the foreigners, the developers and the sales agents, we are left with two targets for the next set of cooling measures, if any.

Perhaps one approach would be to require valuers to disclose their assumptions and methods to the MAS and valuations for new launches to take into account values of other properties in the neighbourhood. Banks may be instructed to lend for new launches based on this more comprehensive and inclusive method of valuation.

Furthermore, seeing the strong response to the attractive investment package at Spottiswoode18 this week, I believe tougher measures to restore sanity to the market may not be far away.

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