Originally Posted by
Amber Woods
The GuruView:
To fully understand this apparent contradiction between the facts and the earlier headlines you need to recognise a few things about how a general property market index works.
Sales volumes in the secondary condominium market have dropped dramatically over the last 12 months, and while this gives an indication of where prices are likely to be heading in the future the most important point to note is where the current resale transactions are happening. This affects the general market index, which is used as a proxy for prices rising or falling. The problem is that a change in the types and localities of the properties being measured changes the index – and this may or may not reflect actual price changes.
Consider the following scenario.
In the outer regions of Singapore the prices per sqft are low, and in the core areas they are much higher. Therefore, if sales volumes have fallen, as a proportion of the total sales, in the Outside Central Region (OCR) and, at the same time, have proportionally increased in the Central Region (CR), then the overall market prices per sqft – as measured by the index - will have increased.
Note that this can happen despite the fact that resale condominiums in any given region may, in fact, have gone down in price. Put simply, an ‘apples with apples’ valuation is the only way to get an accurate picture of exactly what is happening to prices.
Similarly, the reverse could also be true. It’s entirely possible that the above scenario hasn’t happened – and rather prices have indeed been rising. The point is that without the ‘apples with apples’ analysis no intelligent conclusion can be made from looking simply at any aggregate index data. From the data provided we can only conclude that prices may have gone up, unless of course they went down – which is not helpful.
A simple way to see how this may happen is the following scenario.
Developers in the OCR may have discounted hard in the primary new homes market, meaning that potential buyers will shift their focus from the secondary market and into the new homes sector. However, new condo supply is more limited in the CR and therefore there is less capacity for people to switch between sectors. So, proportionately more demand remains in the secondary market. That is, you get more high per sqft priced units and fewer low priced psf units being measured by the index, and so the index will rise regardless of whether the actual units themselves rose or fell in price. This is a compositional effect that affects indexes – and so caution needs to be exercised when drawing conclusions from them, particularly over short time periods.
The key point is that very little can be understood from just the headline data on the secondary market. Potential property buyers and investors need to do their research, including talking to the agents on the ground, to see how prices are actually performing in the areas that interested them.