How Much is Proximity to a MRT Station Worth?

In my last 2 blog posts, I discussed the price differential of different ages of condominiums, size of units, as well as how long is the leasehold of the condos. See Areas Where We Saved for Our House Purchase and Could We Afford a Freehold Property? for more info. In both posts, I mentioned my preference for proximity to a MRT station, as there are usually more amenities such as shopping centre, market, hawker centre, etc. Staying close to a MRT station also means that we save on a car, which could potentially cost $200K or more in future expenses. However, I also note that the closer a condo is to a MRT station, the more expensive it is. So how much more expensive is it?

Let us compare 2 condos that are still being built. One is within walking distance of a MRT station while the other one is far away from it. Using the same convention as the last 2 blog posts, the one that is near to a MRT station is Condo C (the same Condo C in Areas Where We Saved for Our House Purchase), while the one that is far away is known as Condo D (Condo D is in the same area as Condos E & F in Could We Afford a Freehold Property?) Both are 99-year leaseholds. Both will be completed in 2020. So, the main difference between Condos C and D is the proximity to a MRT station.

The average transaction price of the condo units for the 2 condos from Jan 2017 to Jan 2018, by no. of rooms and floor area respectively, are shown below.

Rooms	Condo C	Condo D
	MRT	No MRT
2	$1,027	$845
2+Study	$1,091	-
3	$1,226	$1,138
4	$1,532	$1,385
5	$1,717	-

Area	Condo C	Condo D
	MRT	No MRT
601-700	-	$845
701-800	$1,027	-
801-900	$1,091	-
901-1000	$1,226	$1,138
1001-1100	-	-
1101-1200	$1,532	$1,385
1201-1300	-	-
1301-1400	$1,717	-

Do note the limitations for the data above, which are described in greater details in Areas Where We Saved for Our House Purchase. However, because both are newly launched condos, there are a lot more transactions for them. Hence, their prices are more reflective of the current investor sentiments. On average, Condo C has 12.2 transactions per month while Condo D has 63.9 transactions per month.

From the data above, it is natural that Condo C, which is close to a MRT station, is more expensive than Condo D. For a 2-room unit, Condo C is more expensive than Condo D by $182K, but that is also partly because Condo C has a larger floor area. The average floor area of a 2-room unit in Condo C is 771 sq ft, while that in Condo D is 660 sq ft. The price difference for a 3-room unit and 4-room unit is $88K and $147K respectively.

Using a 3-room unit as an example, would I be willing to pay $88K more for proximity to a MRT station? Definitely! In terms of finance, we save on a car (or 2 cars to last us until we retire). Each car can easily cost $100K, not to mention the running costs. So while we pay $88K more for the convenience of a MRT station, we save at least $200K in future expenses from not having to own a car. The net saving is at least $112K for staying close to a MRT station. In terms of travelling time, assuming we do not own a car, we save at least 15 minutes travelling from the MRT station to Condo D as compared to Condo C. Multiply that by 2 for the journey to-and-fro, and multiply the resultant figure by the no. of journeys per year, it adds up to very significant time savings. In terms of convenience, there are usually a lot more amenities near to a MRT station. If you are hungry, you could go to some nearby coffeeshops which are open 24 hours a day. If you forget to buy something, you could walk to a 7-eleven store to get it. In contrast, if you stay in an area with no MRT station, even getting something can mean a 20-minute bus ride to the nearest town!

In conclusion, while a condo within walking distance of a MRT station is more expensive, the higher price will usually pay off by itself in terms of finance, travelling time and convenience.

See related blog posts:

• Areas Where We Saved for Our House Purchase
• Could We Afford a Freehold Property?
• Do Properties or Shares Make Better Investments?

Could We Afford a Freehold Property?

As mentioned in last week's blog post, Areas Where We Saved for Our House Purchase, we were looking for a condominium somewhere in between where our parents stay. The area that we looked at has only 99-year leasehold condos. Since leasehold properties have to be returned to the government after the lease expires, we wondered, out of curiosity, whether we could afford a 999-year leasehold or freehold condo which could retain value much better than a 99-year leasehold condo.

In recent years, there are very few new 999-year leasehold or freehold condos. We went to an area where there are a few older condos, aged around 10 years old, which is the age of the condo that we bought. Our condo is a 99-year leasehold starting from 2002 and completed in 2007. There, we found a condo which is a 956-year leasehold starting from 1928 (leaving it with 867 years more on the leasehold) and another condo which is a freehold. For all purpose and intent, the 956-year leasehold is almost like a 999-year leasehold. Continuing the convention used in last week's blog post, we will call the above-mentioned 3 condos as Condo A (99-year leasehold), Condo E (999-year leasehold) and Condo F (freehold). The average transaction price (not price per square foot) of the condo units between Jan 2017 and Jan 2018, by no. of rooms and floor area respectively, are shown below.

Rooms	Condo A	Condo E	Condo F
	99-year	999-year	Freehold
2	$953	$1,111	$1,007
2+Study	$979	-	-
3	$1,182	$1,438	$1,255
4	-	$1,830	$1,680
Penthouse	-	$2,450	$2,320

Area	Condo A	Condo E	Condo F
	99-year	999-year	Freehold
801-900	$953	-	-
901-1000	$979	$1,111	$1,007
1001-1100	-	-	-
1101-1200	$1,182	-	-
1201-1300	-	$1,438	$1,255
1301-1400	-	-	-
1401-1500	-	-	-
1501-1600	-	$1,830	-
1601-1700	-	-	$1,680

Do note the limitations for the data above, which are described in last week's blog post. On average, Condo A has 3.1 transactions per month, Condo E has 2.8 transactions while Condo F has 0.8 transactions.

Looking at the data above, the 999-year leasehold condo is more expensive than the freehold condo, likely due to the small no. of transactions for the freehold condo. I will assume that the prices for Condo F are anomalies and consider only the 999-year leasehold condo.

Comparing between Condo A and Condo E, the price difference is $158K for a 2-room unit and $256K for a 3-room unit. A 2-room unit in Condo E costs slightly less than a 3-room unit in Condo A and is still within our loan eligibility. However, the area where Condos E and F are located is far away from any amenities. It has no MRT station, shopping centre, market, hawker centre, not even a retail mom-and-pop stall. Even the bus stop along the main road is some distance away. To buy groceries, we would need to take a bus to the nearest town centre and cart them back. It would be difficult to commute to and fro daily. A car is necessary, which would add at least another $200K in future expenses. After considering these additional expenses, the 999-year leasehold or freehold condo is out of our reach.

In the final analysis, even though a 999-year leasehold or freehold condo would provide much better investment value, it is really inconvenient for us. A house should be a place where we seek comfort after a hard day of work, not a place where we have to labour to and fro everyday. For these reasons, we did not consider the 999-year leasehold or freehold condo.

See related blog posts:

• Areas Where We Saved for Our House Purchase
• How Much is Proximity to a MRT Station Worth?
• Do Properties or Shares Make Better Investments?

Areas Where We Saved for Our House Purchase

I have never been a fan of property investments, mainly because of the demographic changes that Singapore will face in the next few decades. See A Prediction About Properties 13 Years Ago for more information. Yet because I am planning to get married, I have no choice but to get a property of our own. I could not possibly be telling my girlfriend "let's not get married now, considering property prices are so high. 5 years later would be a better time, and 10 years later would be even better". You can guess what would be the outcome if I said that. So, no choice, we had to look for a property. After considering each other's preferences and aspirations, we decided to look for a condo first, before looking for a HDB flat if no suitable condo came up.

The area we looked at is somewhere in between where both our parents are staying. There are a couple of condos in the area, some are more than 10 years old while others are still being built. To simplify the discussion, we will just discuss 3 condos, let me call them Condo A, which is 10 years old (as at last year when we were house hunting), Condo B, which is 5 years old, and Condo C, which is still being built. The types of units we considered are 2-room, 2+study and 3-room. All 3 condos have these units.

Thankfully, we found a 2-room unit in Condo A that we both liked. It turns out that it is also the lowest-priced condo among all the possible permutations. After we bought the condo, I checked the average price transactions for the past 1 year (Jan 2017 to Jan 2018) for the 3 condos on SRX, a portal for buying, selling and renting properties in Singapore. There is quite a large price differential between the different condos and unit types.

However, before I discuss the price differentials, there are a few things to take note. Firstly, the floor area is not the same for different condos even though they may have the same no. of rooms in the units. Based on the 3 condos being discussed, the newer condo tends to have smaller floor areas. To make the comparison more meaningfully across condos, I compare using floor area of the unit instead of how many rooms the unit has. Secondly, while the floor area of an unit is well-defined based on the information from SRX, the no. of rooms is not so certain. There is some guesswork whether the unit is a 2-room unit or 2+study unit based on the floor area. Thirdly, as Condo C is still being built and sold, there are a lot more transactions than the other 2 condos. Its prices will be more reflective of the rising investor sentiments compared to the other 2 condos. On average, Condo A has 3.1 transactions per month, Condo B has 1.6 transactions, while Condo C has 12.2 transactions.

Below is a summary of the average transaction price (not price per square foot) of the condo units, by no. of rooms and floor area respectively.

Rooms	Condo A	Condo B	Condo C
2	$953	$1,000	$1,027
2+Study	$979	$1,039	$1,091
3	$1,182	$1,277	$1,226
4	-	$1,546	$1,532
5	-	-	$1,717

Area	Condo A	Condo B	Condo C
701-800	-	-	$1,027
801-900	$953	$1,000	$1,091
901-1000	$979	-	$1,226
1001-1100	-	$1,039	-
1101-1200	$1,182	-	$1,532
1201-1300	-	$1,277	-
1301-1400	-	-	$1,717
1401-1500	-	$1,546	-

Size Differential

As mentioned, all 3 condos have 2-room, 2+study and 3-room units. In condo A, compared to a 2-room unit, a 2+study unit is $26K more expensive on average while a 3-room unit is $229K more expensive.

Across condos, the price differential generally tends to be larger for new condos, at least for the 3 condos discussed. 

Age Differential

For a unit with a floor area of 801-900 square foot (equivalent to a 2-room unit in Condos A and B, but a 2+study unit in Condo C), compared to Condo A (10 years old), Condo B (5 years old) is $47K more expensive and Condo C (still being built) is $138K more expensive.

Similarly, the larger the floor area, the larger is the price differential across condos. For a unit with floor area of 1101-1200 square foot (equivalent to a 3-room unit in Condo A and 4-room unit in Condo C), the price difference is $350K.

Other Differentials

The above 2 factors are only 2 out of many factors that can affect the prices of the units. Some of these include whether the unit is facing a beautiful water body like river/ lake/ reservoir, height of the unit, etc.

Savings

Within the limits of affordability and loan eligibility, we did not use price as the yardstick. But by choosing an older condo, we saved $47K to $138K for an equivalent unit of 801-900 square foot and by choosing a smaller unit within the same condo, we saved $26K to $229K. In total, we saved anywhere from $26K to $324K, depending on which unit is being compared against.

There is probably another area that we save money on, but it could have been reflected in the higher prices of the condos. I prefer that the condo we buy must be within walking distance of a MRT station. This way, we save on not having to own a car. A car could easily cost $100K, not to mention the running costs. Since a car can only last for 10 years, we will probably need 2 cars to last us until we retire, so that translates to another $200K in future savings at the minimum.

Conclusion

I still believe that properties are not good investments over the long run. But sometimes, you just cannot choose the timing of your purchase. And thankfully, we found a condo that we like and can afford with a loan.

Last but not least, wishing all readers a Happy and Prosperous Chinese New Year!


See related blog posts:

• A Prediction About Properties 13 Years Ago
• Could We Afford a Freehold Property?
• How Much is Proximity to a MRT Station Worth?

Properties and the Arrival of Robots and Automation

Recently, I went to view some houses and realised how expensive houses have become. A 2-bedroom condominium in Jurong could go for $1 million and a 4-room HDB flat in Clementi could sell for $700K to $800K. If you read my past blog posts on Properties, you would know that I am not a fan of properties in the long-term, mainly because of the ageing population in Singapore (see Properties, the Population White Paper and the Land Use Plan for more info). 

In the past 1 year, I have also begun to worry about robots and automation taking away jobs (see Early Retirement Maybe A Luxury That I Cannot Afford for more info). I believe that everyone would need to keep on learning and re-learning, and be prepared to change careers at least 1-2 times in their economic lifespans in order to adapt to changes brought on by technology. And in the worst case scenario, a lot of human jobs would be displaced by robots and automation.

For most people, housing is an expensive item and it can take 20 to 30 years to fully repay a housing loan. When you superimpose the trend of robots and automation displacing human jobs with the 20 to 30 years of steady employment required to service housing loans, it raises the question of whether most people can fully pay down their housing loans. And if they could not, what would happen to the housing market in, say, 20 years' time when the full effects of robots and automation happen?

Having said the above, at this point in time, it is not clear whether robots and automation would really displace human jobs on a wide scale as some writers fear, or whether they would allow governments to provide a basic income to every citizen so that everyone need not work and could pursue his/her own dreams. 

Personally, until the effects of robots and automation and governments' responses to them become clear, I would prefer to be more prudent in my housing decisions, i.e. to buy a HDB flat instead of a private condominium if possible, and/or to take a shorter loan tenure such that by the time I am displaced by technology, I would also have paid down the loan fully.

For investors buying properties with the hope of renting them out to foreign talents, robots and automation also raises another issue. If robots and automation really were to displace human jobs, the no. of foreign talents will also decline. Will properties still provide good rental yields in the future? I do not know.

I have raised more questions than answers in this blog post. This is because I also do not have the answers. We can only monitor and act accordingly.

See related blog posts:

• A Prediction About Properties 13 Years Ago
• Properties, the Population White Paper and the Land Use Plan
• Early Retirement Maybe A Luxury That I Cannot Afford

A Prediction About Properties 13 Years Ago

Before I became a blogger in 2012, I contributed to the Straits Times (ST) Forum Page once in a blue moon. My first letter was written in Dec 2004 and discussed the issue of whether downgrading homes was a viable means of providing for retirement. I was 29 that year. Certainly, I was not thinking of retirement then, but what aroused my interest a few years earlier was whether properties could be a viable investment for me. That led me to study how the demographics of Singapore would change in the 35 years from the time I thought of the question to the time I would retire. My conclusion was the demographics was favourable for the 1st half of the 35 years and unfavourable for the 2nd half of the 35 years. The main issues were the low birth rate and greying population in Singapore. Since I had to live in one house for the entire 35 years (and more), I probably would not profit from any property investment over the entire period. Thus, I dropped the idea of buying a private property. 

In Dec 2004, ST ran a special report on retirement and one of the methods mentioned was to downgrade their homes. Since I had thought about the issue and I believed not many people had considered demographics changes in their planning then, I decided to drop a letter to ST Forum Page. In that letter, I mentioned that due to demographic changes, property sellers would progressively increase relative to buyers and eventually outnumber them in 2017. The analysis behind the letter is discussed in greater details in Properties.

Every 5 years, I would update my analysis based on the latest demographics figures to check if there are any changes to the above conclusion. The last update was in 2013, after the release of the Population White Paper and Land Use Plan (see Properties, the Population White Paper and the Land Use Plan). While the year sellers would begin to outnumber buyers has been pushed further from 2017 till 2020, the broad conclusion from 13 years ago remains unchanged: that sellers will eventually outnumber buyers and property investors are facing a significant headwind from demographics in the long run.

Just a personal note, I believed too much in my own analysis and did not recognise that even if there are no profits to be made over the entire 35-year investment period, it is possible to profit from the 1st half of the period by buying properties or property shares. In fact, I even sold Ho Bee at $0.215 in 2003 and did not pick up Chip Eng Seng in 2003/2004 when it was languishing at $0.10! That is my desserts for being a smart alec! 

The one very expensive lesson that I learnt from this episode is that even though the long-term analysis might point in a certain direction, the short- or medium-term analysis might point in an entirely different direction. I should analyse the short-, medium- and long-term situations instead of being fixated by the long-term conclusion.

See related blog posts:

• Properties
• Properties, the Population White Paper and the Land Use Plan
• Properties and the Arrival of Robots and Automation

Do Properties or Shares Make Better Investments?

Singaporeans have a penchant for properties. It is not difficult to understand this, because, land is scarce in Singapore and we often hear stories about people making a lot of money from properties. However, are properties really better investments than shares?

A week ago, Today published an article by OrangeTee titled ECs: Gaining Value Over the Long Term, which shows the gains by Executive Condominiums (ECs) at the end of the Minimum Occupation Period (MOP) and upon privatisation. The results are reproduced below for easy reference.

Fig. 1: Gain by ECs at End of MOP & Upon Privatisation (Source: Today)

The results show that at the end of MOP, which is approximately 7 years from the launch of the EC, not all ECs make money. The average gain from the 21 ECs listed in the study is 5.9%, while the median gain is -13.0%. As Today pointed out, at the end of MOP, ECs are not "sure-win" investments. However, upon privatisation, which is another 5 years from the end of MOP, the average gain of ECs improves to 64.2% while the median gain improves to 43.0%.

How do the above gains compare to that of the Straits Times Index (STI) over the same period, assuming that an investor chooses not to invest in an EC but wait until the end of the year and buy the STI? The results for each batch of ECs and the corresponding returns from STI at the end of MOP are shown below.

Fig. 2: Performance of ECs vs Shares at end of MOP

In the figure above, all ECs having the same year of launch and MOP completion are grouped together. Using the first batch "1996 - 2004" as an example, the first figure (i.e. 1994) shows the year of launch while the second figure (i.e. 2004) shows the year of MOP completion. Together, they show the holding period from launch till end of MOP.

From the figure above, not all ECs make money at the end of MOP. Those launched before 1999 lost money while those launched after 1999 made money. Compared to shares, all batches of ECs underperformed the STI except for the batch launched in 2001 and MOP completed in 2008. Overall, for the 21 ECs studied, ECs returned an average of 5.9% while the STI returned an average of 50.8% over the 7-year holding period. Shares outperformed ECs by 44.8%. 

Fig. 3: Performance of ECs vs Shares upon Privatisation

Fig. 3 above shows the performance of ECs and shares at the end of privatisation, which is approximately 12 years from the launch of the EC. The performance of ECs upon privatisation improved significantly compared to that at the end of MOP. Compared to shares, there are 3 batches of ECs that outperformed the STI, namely, the 1999-2010, 2001-2013 and 2001-2014 batches. However, overall for the 21 ECs studied, ECs still underperformed the STI. The average return by ECs is 64.2% while the average return by STI is 101.5% over the 12-year holding period. Shares outperformed ECs by 37.2%.

The above comparison involves only ECs and not other condominiums. However, according to the study reported by Today, new ECs have an average discount of about 20% compared to new condominiums. This discount reduces to 9% at the end of MOP and 5% upon privatisation. Thus, if ECs, with their price advantage over mass market condominiums, already underperform shares, it can be inferred that mass market condomiuniums will also underperform shares. 

It should be noted that the above comparison does not include rental yields by ECs and dividend yield of STI. The average rental yield is around 3-4% while the average dividend yield is 3%. Thus, the exclusion of rental yield and dividend yield does not significantly affect the outcome of the comparison.

Having said the above, although properties generally underperform shares, there are vintages for both properties and shares. Properties bought in certain years tend to perform better than properties bought in other years. Shares have the same characteristics. Thus, there will be periods when properties will outperform shares. It is therefore important to be selective and buy properties and shares when they are undervalued. 

In conclusion, the comparison shows that, contrary to popular perceptions, properties are, in general, not better investments than shares. The main reason for the popular perception is likely because properties are usually bought with bank loans, thus magnifying the gains on the downpayment. On an unleveraged basis, properties are not better investments than shares.

See related blog posts:

• Properties and the Population Picture
• Properties, the Population White Paper and the Land Use Plan
• Properties

Properties and the Population Picture

I've written a couple of times about the potential impact of demographics changes to the property market in future. However, I'm not sure how many people actually noticed and think of it in the current rage over properties. Since words did not effectively convey the message but a picture can say a thousand words, let's try showing pictures instead.

Below is a picture taken from the Opening Address at the “Our Population, Our Future” Townhall Dialogue in Oct 2012. It shows that with a Total Fertility Rate (TFR) of 1.2, the size of every subsequent generation will be reduced by 40%.

Do take note that the picture below does not reflect the current demographics figures. It is reflective only if the TFR persists at 1.2 for at least 2 generations. So, the discussion in this blog post on the potential impact on the property market applies in the future when we are about to retire and not currently.

Figure 1: Impact of TFR of 1.2 on Generation Size

How will the above picture impact the property market in the future? Each generation does not operate independently in the property market. When Our Generation retires, we will need to find alternative sources of income to support our retirement. Since quite many people are asset-rich but cash-poor (and assuming this trend continues), one possible option is to sell our properties to those who are buying, i.e. the Grandchildren Generation who are setting up their families. Even if some of Our Generation do not need to sell or downgrade their homes, eventually their properties will be passed down to the subsequent generations as inheritance.

Hence, based on the above picture, we are looking at 36 nos. of the Grandchildren Generation buying/ taking over the properties of 100 nos. of Our Generation. I cannot see how 36 persons can absorb the properties of 100 persons. We can only hope that our grandchildren will be 3 times as rich as us.

To be fair, the demographics picture above cannot be directly applied to the inter-generational transfer of assets. People are marrying later nowadays, at a median age of 29. So the inter-generational age gap is about 30 years, i.e. when Our Generation reaches the retirement age of 65, the Grandchildren Generation is only about 5 years old, hardly able to support themselves, much less to take over the assets from us. Readjusting the demographics picture to an inter-generational age gap of 20 years, the relative size of each generation would be as follows:

Generation	Age	Size
Our	65	100
"Children"	45	71
"Grandchildren"	25	51

The age of each generation in the above table looks more reflective of the actual age of the net buyers and sellers in the property market, with Our Generation planning to sell at the retirement age of 65 and the "Grandchildren" Generation (in "quotes" to differentiate it from the actual Grandchildren Generation) planning to buy around the marriage age of 29.

Based on the above table, there will 51 nos. of the "Grandchildren" Generation buying/ taking over the properties of 100 nos. of Our Generation. While the figures are better, it still does not change the overall picture that there will be more net sellers than buyers in the property market when we are ready to retire.

Having said that, there are many other factors affecting the property market besides demographics, such as migration, new housing supply and property regulations. A lot of these factors are unpredictable, especially in the long term. But the one fairly predictable factor that is demographics shows that the property market when we retire will be quite challenging. For a more complete discussion of the impact of migration and new housing supply, you can refer to the post on Properties, the Population White Paper and the Land Use Plan.

Interestingly, how did Our Generation end up in such a situation? The figure below shows the relative size of each generation based on an inter-generational age gap of 20 years:

Figure 2: Relative Size of Each Generation

 
The relative size of the "Grandparent", "Parent" and Our Generations are based on the actual population statistics in Jun 2011 for the age groups 75 - 79, 55 - 59 and 35 - 39 respectively (Note: I am in the 35 - 39 age group, but you can recalculate the relative generational size for your own age group using data shown in the post on Properties, the Population White Paper and the Land Use Plan). However, do note that there is higher mortality among the "Grandparent" and "Parent" Generations, so their sizes are smaller than they should be. The relative size of Our, "Children" and "Grandchildren" Generations are based on the TFR projection mentioned above.

As can be seen in Figure 2 above, when Our Generation is buying properties to set up families, the "Grandparent" Generation is much smaller and buyers outnumber sellers. But when Our Generation is going to sell properties when we retire, the "Grandchildren" Generation is also smaller and sellers outnumber buyers. In short, Our Generation is at the short ends of both sides of the transactions.

Nevertheless, there are actions that Our Generation can take to avoid such a situation. We could either have more babies, or avoid being asset-rich and cash-poor when we are about to retire.

See related blog posts:

• Properties 
• Properties, the Population White Paper and the Land Use Plan
• Properties and the Arrival of Robots and Automation

Properties, the Population White Paper and the Land Use Plan

In an earlier post on Properties, I mentioned that it was not ideal to hold properties in Singapore in the long run, mainly because of the rapidly ageing population demographics. In that analysis, I had omitted the effects of migration and new housing supply, which could not be forecast with any certainty then. With the release of the Population White Paper and the Land Use Plan, we now have greater clarity in the migration numbers and new housing supply. How would the analysis change when these factors are included? Let us recap these numbers first.

Migration

In the Population White Paper, it was mentioned that the number of new citizens would increase by between 15,000 and 25,000 a year. As for the Permanent Resident (PR) population, it will remain stable at between 0.5 and 0.6 million and forms a pool for potential new citizens. Hence, any increase in the PR population will eventually show up as an increase in the citizen population and can be omitted. The annual increase in the resident (citizen + PR) population will therefore be between 15,000 and 25,000. For simplicity, let us assume an average figure of 20,000 new residents per year. As for the non-resident population (e.g. employment pass and work permit holders), they can be excluded as they are more likely to rent than buy properties.

New Housing Supply

In the Land Use Plan, it was mentioned that there will be another 700,000 new houses, increasing the total number of houses from 1.2 million to 1.9 million by 2030. Of these, 200,000 new houses will be ready by 2016. From 2017 till 2030, it is assumed that the new housing supply will be evenly distributed, i.e. 35,700 per year. Based on past trends, each house will be able to accommodate 3 persons.

Analysis: Base Population Only

To recap, Figure 1 below shows the population projections excluding migration and new housing supply based on the population figures in Jun 2011. (Please see the earlier post on Properties for how the population projections are derived). Based on these figures, the ratio of potential buyers/ upgraders to potential sellers/ downgraders (i.e. all buyers/ sellers) will cross parity in 2025.

Figure 1: Population Projections Based on Base Population

Analysis: Base Population + Migration

If we include migration at 20,000 per year (or 100,000 per 5-year period) and distribute them in proportion of 40%, 40% and 20% in the age groups of 25 - 29, 30 - 34 and 35 - 39 respectively, the population projections can be seen in Figure 2 below. The year that the ratio of all buyers to sellers will cross parity will increase from 2025 to 2029.

Figure 2: Population Projections Based on Base Population + Migration

Analysis: Base Population + Migration + New Housing Supply

If we now include new housing supply in the analysis, the population projections are shown in Figure 3 below. The year that the ratio will cross parity will change from 2025 (base population) to 2029 (base population + migration) to 2020 (base population + migration + new housing).

Figure 3: Population Projections Based on Base Population + Migration + New Housing Supply

Overall Analysis

If we compare the ratio of all buyers to sellers for the 3 scenarios mentioned above, the effects of migration and new housing supply can be seen in the figure below.

Figure 4: Ratio of All Buyers/ Sellers for the 3 Scenarios

As shown in Figure 4, migration will increase the ratio of all buyers to sellers and delay the year the ratio crosses parity. On the other hand, new housing supply will decrease the ratio and bring forward the year the ratio crosses parity.

It should be noted that the sharp drop in the ratio due to new housing supply in 2016 and 2021 should not cause too much alarm, as any housing demand has to be met by the existing housing stock and/or new housing supply.

In conclusion, regardless of which scenario we look at, the general trend is clear: sellers will eventually outnumber buyers even if we consider migration. Property investors are facing a significant headwind from demographics in the long run.


See related blog posts:

• Properties
• Properties and the Population Picture
• Properties and the Arrival of Robots and Automation

Properties

Properties are the favourite investment class in land-scarce Singapore. Many people have heard and seen for themselves how a flat that cost their parents a few thousand dollars in 1960s could rise to hundreds of thousand dollars currently. The conventional wisdom is that land is scarce in Singapore, therefore, property prices has only one way to go, which is up.

I'm not a property investor. However, I did researched about the prospects of property investment in the long-term 10 years ago, and my conclusion was that it was not ideal to hold on to properties past the year 2017. This point was shared in a letter to the Straits Times Forum Page in response to a Special Report titled “Can You Afford to Retire?” on 18 Dec 2004. Because of this research, I have avoided property investment and missed the great property boom experienced in the last couple of years. I'll share the findings here for discussion.

The primary reason for property investment not being an ideal investment in the long-term has to do with the population demographics of Singapore, which by now, everyone knows is ageing rapidly. Below are the population projections in Jun 2001, at the time of my research. The population projections in the subsequent years are obtained by shifting the 2001 population forward, i.e. the population aged 0 - 4 in 2001 would be aged 5 - 9 in 2006, 10 - 14 in 2011, so on and so forth. The birth rates in subsequent years are maintained at the prevailing levels.

Figure 1: Population Projections Based on 2001 Population Statistics

Let's assume that the house-buying population is aged 25 - 39, the upgrader population is aged 40 - 49, the downgrader population is aged 60 - 74 and the house-selling popuation is aged 75 and above. To simplify the analysis, let's further assume that there is no net migration and no new houses built. The ratio of potential buyers/ upgraders to potential sellers/ downgraders is a healthy 4.02 in 2001, which means that there are 4 potential buyers/ upgraders for every potential seller/ downgrader. This is a good time for holding property investments. However, this ratio decreases rapidly with time and crosses parity in the year 2020, making property investments less attractive in the long-term.

How would the ratios change if we consider net migration and new houses being built? The ratios would be more favourable with migration as there would be more buyers. On the other hand, the ratios would be less favourable with new houses built as there would be more sellers. It is unclear which of these factors would play a bigger role. Given the uncertainty of the impact of these factors and that they partially offset each other, we can leave them out of the analysis for now.

With the advantage of hindsight, we can review the same analysis using the population statistics in 2006 and 2011. The results are shown below.

Figure 2: Population Projections Based on 2006 Population Statistics

Figure 3: Population Projections Based on 2011 Population Statistics

As you can see, the ratios have improved, due to increased migration over the years. For all buyers/sellers, the year that the ratio will cross parity has increased from 2020 (based on 2001 population statistics) to 2022 (2006 statistics) to 2025 (2011 statistics). Nevertheless, the fact that sellers will eventually outnumber buyers remains unchanged. Property investors are facing a significant headwind from demographics in the long run.

To improve the situation, the demographics challenge needs to be improved, with more babies and/or migration. In addition, there should be a means to buy back houses from the elderly population who wishes to monetise their flats to fund their retirement. The lease buy-back scheme in which HDB buys back the tail-end of the lease is a good solution. Allowing residential real estate investment trusts (REITs) to be set up to buy-and-leaseback the flats to elderly (with safeguards) might be a feasible option too.

It is interesting to note that the old Chinese saying, "to raise children to guard against old age", is still as apt as ever in today's challenging demographics environment.


See related blog posts:

• Properties, the Population White Paper and the Land Use Plan
• Properties and the Population Picture
• Do Properties or Shares Make Better Investments?