The Trouble with Shoebox Homes

UPDATE: CIMB has clarified that they are still offering financing for shoebox units.

By Calvin Yeo (guest contributor)

According to PropertyGuru, at least one bank in Singapore is declining all loan applications for properties under 500 square feet in size, which are termed shoebox units in Singapore. The property market sentiment is generally poor now and banks are keeping a tight rein on financing. This also comes on the back of poor stock market sentiment which is in part caused by the Greece crisis and slowdown of the China and US economy.

Apparently, an unnamed employee of CIMB said that they are no longer offering financing for shoe box units, even for high credit rating clients. The reasons given are extremely high prices per square foot as compared to more reasonably sized units. Another reason given is that the buyers of these units tend to be investors rather than owner occupiers, which means that default rates will probably be higher if there is an economic downturn. I wonder if other banks may follow suit. So far though, the local banks have not said anything.

More regulation coming for shoebox units?

Minister of National Development Khaw Boon Wan, who is responsible for housing matters, has repeatedly dropped hints that shoebox units could be regulated. Among some of his comments were that most of the buyers for these shoe box units had HDB addresses, which indicates that they are likely not rich investors and could ill afford a downturn should their investment turn sour.

Minister Khaw said: “They must have seen shoebox units in the central region being able to be tenanted out easily with reasonable yield. The difference this time round is that most of the units are in the heartlands — where the market is untested.” He added that he would not hesitate to intervene should there be clear evidence of unsustainable investor demand for shoebox apartments.

Record sales for “inhuman” shoebox units

There is good reason to be concerned as CBRE reported that smaller units are being built, with median size of homes shrinking 24 percent to 667 sf. Furthermore, there is a record number of shoebox units sold this year where private apartments below $750,000 made up 42% of new home sales, up from 25% in the previous quarter according to the URA. The small size, and hence the affordable quantum, is also one of the reasons per square foot prices continue to rise despite several government measures to control housing prices.

Even CapitaLand CEO Liew Mun Leong joined in the fray by calling shoe box units “inhuman”. He said that it was not good for the welfare of the family to feel constrained, which I certainly agree with. Apparently CapitaLand has been lobbying against shoebox units, after Mr. Liew visited a 400 square foot unit in Hong Kong. After having been to Hong Kong, I can’t help but agree with him – there should be a minimum apartment size set at 500 square feet. Anything below that compromises the occupants’ quality of life. The minimum size should also serve to help control the rising per square foot prices.

Guest contributor Calvin Yeo is the founder of the Making Passive Income blog. He graduated with a Business Major in Finance and Accounting and spent a few years working in an investment bank. The knowledge from his studies and working experience serve as a good base for him to grasp the ideas for passive income generation.

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