Old and boring, but outperforming

As is true with any market, the residential property market is not monolithic. In Singapore, it consists of many different segments, including the Housing and Development Board’s Build-to-Order and resale flats, as well as private condominiums and landed homes.

Within each market segment, specific areas and homes perform differently and have reacted to the Government’s property cooling measures and loan curbs in different ways.

SRX Property data shows that overall private non-landed housing prices have fallen 6.2 per cent since their market peak in January last year. The luxury housing project Ardmore Park, however, has seen prices plunging 23 per cent in roughly the same period. The reason for the difference in price depreciation is that the supply and demand characteristics in Ardmore Park’s pocket of the market are different from those of the overall condominium market.

In Ardmore Park’s case, several new projects on the same street have been built in the recent years, causing supply to increase for luxury apartments just as the cooling measures reduced demand. As a result, Ardmore Park owners have had to sell at a significant discount to the overall market.

January 2014 was an important month in Singapore’s real estate history. It was the turning point at which the Total Debt Servicing Ratio (TDSR) was able to stop the prices of the overall private condo market from rising. Yet, not all private condos have seen price declines since then.

According to SRX Property, 85 per cent of private condos with statistically significant transactions from January 2014 to March this year have seen a decline in price per square foot (psf). This means that 15 per cent of private condos have experienced an increase in psf prices.

So what have these private condos done right? Millennials are going to hate the answer. The reason that these condos outperformed the overall market has to do with their maturity and stability — traits that tend to be boring to millennials.

The private condos that shot up in price prior to the TDSR tended to be hot new projects with a buzz surrounding them. In some cases, in their effort to get in on the next new thing, buyers and investors bid prices well above the fundamental values of the projects and their neighbourhoods.

Each neighbourhood has a fundamental price for similar projects in the area. Sometimes, prices get out of whack. For example, a buzz around a project, especially a new one, pushes prices above the area’s fundamental value. At other times, the market can forget about some projects, especially the older ones, and units in those developments trade below the fundamental value.

Over time, though, the prices of similar projects tend to equalise. This means that the overpriced homes will decline, while the underpriced homes will increase, until prices of similar projects in the neighbourhood have achieved equilibrium. Using information and technology, a smart real estate investor or agent can identify areas in which projects are in the process of equalising and take advantage of the opportunities presented by this phenomenon.

For example, take the Simei neighbourhood. Melville Park’s psf price has increased 4.2 per cent since the TDSR. It is the only project in the neighbourhood that has increased in value during this period, yet it is the oldest in its peer group — having obtained its Temporary Occupation Permit (TOP) in 1996 — and has the lowest psf price, by far.

Melville Park fits the old real estate adage that says, “Buy the least expensive home in the most expensive neighbourhood you can afford.”

The fact that Melville Park’s psf price is significantly below that of its newer neighbours suggests that it has room to grow, even while the cooling measures are putting downward pressure on the overall market for private condos.

What we have noticed about the private condos that have appreciated since the TDSR is that they tended to be older and have 99-year leasehold as well as low psf prices relative to their peer group. Sorry, millennials, as the cooling measures work their way through the market, it looks like the old guys are having the last laugh.

ABOUT THE AUTHOR: Sam Baker is co-founder of SRX Property, an information exchange formed by leading real estate agencies in Singapore to disseminate market pricing information and facilitate property listings and transactions. For more details on the data and calculations used in this article, visit SRX.com.sg/research.