Why new launches attract more buying compared to resale

[Secretariat]

Let's look at the possible rationale behind this behavior, and then attempt to understand the implication of CM6.

(This essay explores the subject in simplistic term, for a forum discussion. It assumes that the current property price rally is genuine, and the cause of it is outside the scope)

When looking all the CMs before CM6, the real test came in CM4, specifically the additional stamp duty liability of (16% if owner sells one year after purchase. 12% after 2 years. 8% after 3 years and 4% after 4 years).

CM4 came in January 2011.

In order to mitigate this liability risk, a rationale investor will then find the way to pass this risk to another party, failure of which, he will analyze the potential downside risk. The situation in which the risk becoming real is mainly should he loses his source of income.

Two ways where the risk is mitigated:

- CM4 effectively eliminated flippers. Every investor buying a property post-CM4 buys with a clear intention to hold until at least the 5th year, to avoid the SSD liability. But how to minimize the purchase cash-flow requirement. Here he finds it in the payment schedule of new launches, which spreads typically over 4 or 5 years until the construction TOP,

- And what if he loses his source of income within this SSD liability period? The outcome depends on the project he invested on. If the project has been sold-out, then he can be more assured that every investor there is undergoing the locked-in, and more likely than not there is a waiting-list as well. So his risk is more or less the SSD liability, and not a fire-sale devaluation of his purchase price.

It is not the same level of risk when we look at resale:

- SSD similarly applied when he buys a resale, plus a 100% drawdown of his housing loan, if any,

- in the situation that he loses his source of income, he faces a very real risk of fire-sale, as there are also other units being put on sale.

Now, does the latest CM6 changes the attractiveness of buying new launches over resale? Obviously it does, because a larger upfront sum is required for an investment.

Investors with capacity to come up with 60% without financing in particularly will now weigh the risk of buying new launches viz-a-viz resale. But what kind of resale will be attractive. I will venture that resale of projects that just received the TOPs being the top draw.

When looking at it this way, CM6 has a beneficial effect to the lifespan of the current price rally. It allows projects that have been launched in 2009-10, the investors then a greater chance of realizing the paper-gains (as prices have since gone up). An opportunity for the market to consolidate, so to speak.

Whether MAS intended CM6 to have this effect is not too important for us to think about.

[kane]

CM or no CM, singaporeans love new, that's the reason why resale trades at a 20-25% discount as compared to new sale.

[Secretariat]

CM or no CM, singaporeans love new, that's the reason why resale trades at a 20-25% discount as compared to new sale.

Love new?

A real new house, or a virtual house?

[azeoprop]

For those who can only get 60% loan, buy new BUC only need to pay 20% + stamp duty. The other 10 + 10% will only pay later depending on how fast the construction is.

At least like that cash flow not so tight compared to resale, instant 40% gone.

[lifeline]

agree with above reasoning for purchases of new launches.

the opposite is also true - less competition for subsales and resales.
in fact the asking for my friends purchases of subsales actually moved down post cm cf pre cm.

[howgozit]

The remaining 10+10% is only over a span of at most a couple of years ... very often it is much less than that.

I am wondering how a person who buys a $1m property cannot raise $400k all at once but can raise $200k initially followed by another $200k over the next year or so. Surely he would already have in hand the $200k, otherwise it would be dicy to make a property purchase.

If he already has the $200k, how much interest can he gain by leaving it in the bank? Would he instead use the $200k to punt the stock market? Would that be prudent, knowing that this money would be called upon soon by the developer.

I am really curious how it can be beneficial.

[teddybear]

Well, I have been saying all along that CM4 has the unintended/intended effected of pushing property buyers to favour new launch vs resale so that they can minimize cash outlay. All those lower LTVs CMs etc also have additionally aggravated such effects. No wonder people are willing to pay $1500 psf for new launch like in Bedok but yet unwilling to pay $1100 psf for resale nearby (and that is >36% premium over resale)!

Let's look at the possible rationale behind this behavior, and then attempt to understand the implication of CM6.

(This essay explores the subject in simplistic term, for a forum discussion. It assumes that the current property price rally is genuine, and the cause of it is outside the scope)

When looking all the CMs before CM6, the real test came in CM4, specifically the additional stamp duty liability of (16% if owner sells one year after purchase. 12% after 2 years. 8% after 3 years and 4% after 4 years).

CM4 came in January 2011.

In order to mitigate this liability risk, a rationale investor will then find the way to pass this risk to another party, failure of which, he will analyze the potential downside risk. The situation in which the risk becoming real is mainly should he loses his source of income.

Two ways where the risk is mitigated:

- CM4 effectively eliminated flippers. Every investor buying a property post-CM4 buys with a clear intention to hold until at least the 5th year, to avoid the SSD liability. But how to minimize the purchase cash-flow requirement. Here he finds it in the payment schedule of new launches, which spreads typically over 4 or 5 years until the construction TOP,

- And what if he loses his source of income within this SSD liability period? The outcome depends on the project he invested on. If the project has been sold-out, then he can be more assured that every investor there is undergoing the locked-in, and more likely than not there is a waiting-list as well. So his risk is more or less the SSD liability, and not a fire-sale devaluation of his purchase price.

It is not the same level of risk when we look at resale:

- SSD similarly applied when he buys a resale, plus a 100% drawdown of his housing loan, if any,

- in the situation that he loses his source of income, he faces a very real risk of fire-sale, as there are also other units being put on sale.

Now, does the latest CM6 changes the attractiveness of buying new launches over resale? Obviously it does, because a larger upfront sum is required for an investment.

Investors with capacity to come up with 60% without financing in particularly will now weigh the risk of buying new launches viz-a-viz resale. But what kind of resale will be attractive. I will venture that resale of projects that just received the TOPs being the top draw.

When looking at it this way, CM6 has a beneficial effect to the lifespan of the current price rally. It allows projects that have been launched in 2009-10, the investors then a greater chance of realizing the paper-gains (as prices have since gone up). An opportunity for the market to consolidate, so to speak.

Whether MAS intended CM6 to have this effect is not too important for us to think about.

[howgozit]

My personal opinion is that it has little to do with CM4.

I believe there is some truth to what @kane said.... ie. people like new.

In addition, people are taken in by the whole marketing ploy by the developers. Attractive agents, designer decor showflats, ready tie-up with financing, pre-launch "discounts".... etc.

Basically anybody who pays 20-25% (even 36%!) premium over a resale cannot be doing it for financial reasons... it simply cannot be. It does not make sense if that person owns a calculator. The reason has to be something else... I suspect a psychological one.

How many people would buy regardless of new launch or resale if he does not have the 40% at the point of purchase? Yes .. there will be some... but I am very sure it is not the case for the majority. The "benefit" if any is very minimal.

[teddybear]

Well, I talked to many of these new launch buyers, and their reason is: "Only need to come out with 20% only without taking any loan, the rest can wait 3-4 years! By then SSD almost over and can flip for profit!"
So that is why then I understand that by buying new launch:
1) they are not really affected by SSD
2) they are not affected by lower LTV (since even if LTV is 40%, they still pay 20% upfront only right? The rest can wait 3-4 years! However, resale property buyers are immediately hit as they need to come up with 60% upfront!)
3) they are not affected by the max 35 years tenure loan regulation and 30 years LTV 40% regulation (i.e. CM6 has no effect on new launch buyers!)

So CM3-CM6 all no effect on new launch buyers. Is it any wonder that they die die must buy new launch?
If their intention is to flip for a profit, they won't care how much they pay as long as they sell at a higher price to the next "greater fool" they are "hoping" to sell to right?

This is no difference from many stock buyers. They only buy when the stock prices are very high because they thought stock prices high means more demand and more buyers to sell to mah?!

My personal opinion is that it has little to do with CM4.

I believe there is some truth to what @kane said.... ie. people like new.

In addition, people are taken in by the whole marketing ploy by the developers. Attractive agents, designer decor showflats, ready tie-up with financing, pre-launch "discounts".... etc.

Basically anybody who pays 20-25% (even 36%!) premium over a resale cannot be doing it for financial reasons... the CM4 does not make it very much more onerous.

How many people would buy regardless of new launch or resale if he does not have the 40% at the point of purchase? Yes .. there will be some... but I am very sure it is not the case for the majority. The "benefit" if any is very minimal.

[howgozit]

Based on the normal progress payment of a new launch, the 40% comes up pretty fast... I don't think it is 3-5 years

[howgozit]

http://www.ura.gov.sg/lad/HBG/progre...s.htm#standard

[DC33_2008]

But I am still puzzled with people paying about $1000++psf for new units that have not one but two large balconies withi area larger than living room and two large airconditioned ledges which only requires one. All these people bought with eyes open. They will feel cheated when they move in two years later.

[howgozit]

For sure, the first 10% of the 10+10% drawdown will happen very fast... less than a year bcoz that is the completion of the foundation. the next 10% will vary but definitely not 3-5years.

How to flip like that?

[kane]

The tendency to favour new over resale has already been them all along. The CM merely cemented that preference even further. In 2009, during the low, resale was going for 25-30% discount within the same vicinity. Fast forward a few years later. The gulf still persist. But there's probably more new sale as compared to resale than before.

[howgozit]

Many are fooled by designer decor of showflat. Dazzled by the showmanship of the sales team.

At showflats, periodic announcements are made to keep the potential buyers abreast of the available and sold units. This creates an atmosphere "desirability" and also "anxiety".

I was at ECO and was discussing one particular unit with an agent when over the loudspeakers we heard it announced that it was sold. The agent behaved like it was like such a great pity and loss... if I had been very serious about buying I would have felt great remorse and anxious to grab the next one that I am eyeing

But I am still puzzled with people paying about $1000++psf for new units that have not one but two large balconies withi area larger than living room and two large airconditioned ledges which only requires one. All these people bought with eyes open. They will feel cheated when they move in two years later.

[howgozit]

All else being equal, new should always command a premium over old. This applies to everything other than antiques.

But at the quantum we are talking about in Singapore, 25-30% premium is just plain silly.

IMHO.

[ekl2ekl2]

Many are fooled by designer decor of showflat. Dazzled by the showmanship of the sales team.

At showflats, periodic announcements are made to keep the potential buyers abreast of the available and sold units. This creates an atmosphere "desirability" and also "anxiety".

I was at ECO and was discussing one particular unit with an agent when over the loudspeakers we heard it announced that it was sold. The agent behaved like it was like such a great pity and loss... if I had been very serious about buying I would have felt great remorse and anxious to grab the next one that I am eyeing

Yes, agree. The psychological impact is immense when one by one announcements are made for each successful purchase.
This has been used in time share schemes, in USA the good thing is that buyers can return within a few weeks without penalty if buyers change their minds

[howgozit]

One of those ridiculous "discounts" at ECO was the "proximity" discount of 1%. Even if you stayed at Hougang it was considered within proximity... but as sales heated up they slowly removed it.

Basically ,this is a ploy. It was priced lower under the guise of a "proximity discount" but since sales was was good they decided to remove it. But before they removed it, they informed potential buyers that they are going to do so causing more anxiety to make their purchases.

Had the sales gone the other way, the "proximity discount" could have been increased to 2%.

Basically... we as buyers have ourselves to blame for chasing up the prices.

[teddybear]

No they won't feel cheated because many don't have intention of moving in anyway! So they don't care!

But I am still puzzled with people paying about $1000++psf for new units that have not one but two large balconies withi area larger than living room and two large airconditioned ledges which only requires one. All these people bought with eyes open. They will feel cheated when they move in two years later.

[amk]

The tendency to favour new over resale has already been them all along. The CM merely cemented that preference even further.

Clearly.
CMs do favor new sales. Your 1mil example, what if this buyer has only 350k? For resale he cannot do it at all, for new sale he can. Even if someone does have 400k, chances are they are on other assets, buying new sale gives you time to optimize the timing to unwind your other positions. SSD clearly benefits new sales, as they are largely not applicable when it TOPs. Plus, look, buyers are generally myopic, sentimental, and herd following. Developer's marketing tactics work very well in a crowd.

[vip]

The developers are making good use of Singaporeans' kiasu attitude:

- If everyone is talking about it, that must be the right thing to do.

- If I am not taking action now, I am sure that I will be the one to lose out.

- After I buy, I can come back, reinforce this is the right thing to do, and compliment each other on the great thing we have done.

[kane]

Clearly.
CMs do favor new sales. Your 1mil example, what if this buyer has only 350k? For resale he cannot do it at all, for new sale he can. Even if someone does have 400k, chances are they are on other assets, buying new sale gives you time to optimize the timing to unwind your other positions. SSD clearly benefits new sales, as they are largely not applicable when it TOPs. Plus, look, buyers are generally myopic, sentimental, and herd following. Developer's marketing tactics work very well in a crowd.

i always find those people who need the extra year to amass the next 20% is walking on thin ice. especially when we're talking about sums in the few hundreds of thousand.

yes, the other people grab i better grab euphoria tends to kick in when you're in one of those crowded showroom. the best test is just to walk out of the showroom, breathe some fresh air, take in some sun, look around. do you like what you see. if you do, then go back in and get ready to do battle. if not, get in the car, drive and don't look back.

[chestnut]

i always find those people who need the extra year to amass the next 20% is walking on thin ice. especially when we're talking about sums in the few hundreds of thousand.

yes, the other people grab i better grab euphoria tends to kick in when you're in one of those crowded showroom. the best test is just to walk out of the showroom, breathe some fresh air, take in some sun, look around. do you like what you see. if you do, then go back in and get ready to do battle. if not, get in the car, drive and don't look back.

Bro, there will always be such people. Even in the purchase of cars, u will be surprised at the salaries of some of the drivers who bot BM or Merc. Some are just staying afloat after paying the installments.
Coming back to the housing thingy. Those who were in were in that state of position in 2007 and bot. Guess wat, they were rewarded. The same group of people, transport them back in time to 1996, in 1998, they were forced to sell the house.
So, it is flip of the coin for them. But if the economy is flattish and they still have a job w 5% increase per year. 4 years late, they will be ok. So they are taking a so-called calculated risk and they have faith in their capabilities. This people are ok.

On the hind sight, everything seems easy. Look forward to the future, you need capabilities, knowledge and understanding of your own salary potential. 80% of us are employees. I always fall back to the 80-20 rule.

That's why most of the time, things are not what it seems if u look deeply enough.

Lastly, please understand the human behaviour. If you can understand this portion, trust me, you will start making money. You become the House. And remember, the House always wins. I hope u understand what I am trying to tell u.

[kane]

Yup i know. Sometimes i just marvel at these people's decisions.

[chestnut]

Yup i know. Sometimes i just marvel at these people's decisions.

Bro, I was thinking like this in my early 30s. Then I wondered to myself, why was I wondering and telling myself they are crazy? What do I gain? What about myself, what have I done for myself?

Learn human nature and behaviour. The study of this takes a long time. Learn how they behave. You have already observed their buying behavior, now u just need to put it into practice for your future investment plan.

Another point, the key to investments for u is very simple(bro, if u think I have crossed the line, let me know. I will stop, ok). Learn to make big bucks. Spend more time reading books on eq, a must read is "how to win friends and influence people" by Dale Carnegie. And lastly, a person who can save say 300k a year, guess what is his investment strategy vs a person who gets paid 200k. Notice the diff - saves vs earns.

Sometimes I really feel I share too much.... But I feel u have chemistry w me.

And lastly bro, this is the last time I talk so cheem openly ok. And please, I don't need people to boost my ego in this forum. Trust me, I don't need it in both the forum and the real world.

[Secretariat]

Let's illustrate with the case of an investor.

A simplistic scenario, post-CM6.

In a nice area, Project A getting TOP in Dec 2012, 1000 sqf condo units being offered in resale market at $1.4 mil each. Nearby there is Project B, new launch in Dec 2012, TOP in late 2017, 1000 sqf condo unit at indicative $1.7 mil each.

Investor has to come up with 60% to buy any one of these. His intention is to renovate the unit to be purchased, atas finishing & furniture, budget for ID $100,000.

Project A prospective gross annual rental $60,000. Five years potentially $300,000. Project B's payment schedule, 20% year 1, 20% year 2, 20% year 3.

Which one do you think a rational investor will buy?

[lifeline]

Let's illustrate with the case of an investor.

A simplistic scenario, post-CM6.

In a nice area, Project A getting TOP in Dec 2012, 1000 sqf condo units being offered in resale market at $1.4 mil each. Nearby there is Project B, new launch in Dec 2012, TOP in late 2017, 1000 sqf condo unit at indicative $1.7 mil each.

Investor has to come up with 60% to buy any one of these. His intention is to renovate the unit to be purchased, atas finishing & furniture, budget for ID $100,000.

Project A prospective gross annual rental $60,000. Five years potentially $300,000. Project B's payment schedule, 20% year 1, 20% year 2, 20% year 3.

Which one do you think a rational investor will buy?

all things being equal, good location, both equally good upside, etc etc ...

it all boils down to how much liquid cash the investor has. the investor with the 60% liquid funds, either in bank or from recent sale, will go for project A cos immediate rental yield soon of 4.2%, translates into 7% (cos leverage) - 1% admin - eg 1.2% interest = 4.8% effective yield on cash invested, excluding capital appreciation to at least project B's 1.7mil in 3 years. also can look forward to top effect soon. in addition, in 3 years time, just before project B's top, can even consider swap portfolio to project B!

unless this investor can find a better yield elsewhere, like some of forummers here who are experts in bonds or other instruments, then this may be a useful investment.

otherwise the cash-strapped <60% investor will go for project B, which allows his other funds to come in over the next few years.

[lifeline]

practically the investor will only come up with 40%, why pay 60%, and have a shorter loan tenure. this way the numbers will be even better. 4.2% = 10.5% leverage - 1% admin - 1.2% interest = 8.3% rental yield.

[kane]

Bro, I was thinking like this in my early 30s. Then I wondered to myself, why was I wondering and telling myself they are crazy? What do I gain? What about myself, what have I done for myself?

Learn human nature and behaviour. The study of this takes a long time. Learn how they behave. You have already observed their buying behavior, now u just need to put it into practice for your future investment plan.

Another point, the key to investments for u is very simple(bro, if u think I have crossed the line, let me know. I will stop, ok). Learn to make big bucks. Spend more time reading books on eq, a must read is "how to win friends and influence people" by Dale Carnegie. And lastly, a person who can save say 300k a year, guess what is his investment strategy vs a person who gets paid 200k. Notice the diff - saves vs earns.

Sometimes I really feel I share too much.... But I feel u have chemistry w me.

And lastly bro, this is the last time I talk so cheem openly ok. And please, I don't need people to boost my ego in this forum. Trust me, I don't need it in both the forum and the real world.

No worries. It's some useful pointers there. Will check out the book you mentioned.

[chestnut]

No worries. It's some useful pointers there. Will check out the book you mentioned.

Bro, get the book. Read it and then guess wat age I read the book. U will freak out.
This book is the true 1st investment book for me and still is no1 in my mind.