Property 2006
Published March 30, 2006

The lure of the brand-new home
Buyers are willing to pay a premium for that new condo, even if all they get to see is a showflat, says COLIN TAN

I WONDER if buyers of private condominiums in Singapore realise that they are paying a premium just to have their properties first-hand, ie, brand new, rather than buying in the resale market.

Plain economics: Demand for new properties far exceeds supply and so the price must necessarily rise
An analysis of a small sample of new and second-hand condominiums transacted over the past 12 months showed premiums of new units ranging from 8 to 21 per cent. This was after adjustments for factors such as age, design, facilities, tenure, etc. While this sample may not be entirely representative and the adjustments subjective, it does provide an indication of the price gap between new and resale units.

In the sample, the value of new properties appears to fall sharply within the first few years of occupation before tapering off in the later years - a pattern not unlike that of cars. This is the normal pattern in a stable market. In Singapore, however, the market has become conditioned to a long-term upward price trend.

Unfortunately, there are no official statistics that could give a better measure of the premiums. The closest proxy is the Urban Redevelopment Authority (URA) price index showing median prices of selected private residential properties by completion status. The index has its limitations as it gives median rather than average prices. It also does not show if the property was previously occupied. Fortunately, there are only a small number of newly completed properties which have not been lived in before. Over a seven-quarter period from end-March 2004 to Q4 2005, prices of uncompleted apartments rose by 10.9 per cent. This is 4.5 times more than the 2.4 per cent rise for completed properties. The end of Q1 2004 was the start of the recovery of the private residential market. For condominiums, prices of uncompleted units rose by 6.9 per cent over the same period, 3.3 times higher than the gradual 2.2 per cent rise for completed units.

I am not saying these properties are overpriced. It is just that the demand for new properties far exceeds supply and so the price must necessarily rise. It is also logical as there can only be a limited number of new properties offered for sale at any point in time. On the other hand, there is a lot more supply in the resale market for second-hand properties except that the search process is longer and more troublesome as the properties may be scattered over many locations. However, the larger supply would ensure that prices remain lower.

What is the reason for the high demand for new properties in Singapore? In more mature markets such as the US and Australia, buyers generally prefer to buy completed units. Buying properties off-plan carries some risks, such as the developer being unable to complete the project. Also, it is difficult to visualise the end product even after viewing a show flat. In Singapore, the risk of a developer not completing construction is very low. There are strict rules on the use of sales proceeds collected. Singapore developers have also made the marketing of new units into a new art form. There are designer show flats, furniture vouchers, lucky draws and other freebies thrown in. They have been quick to recognise that these marketing efforts can generate a lot more demand.

Status symbol

Developers here are also helped by the Singaporean fascination with property. With the government's earlier home ownership policy, a large majority of households bought their public flats new, some more than once. Some have gone on to buy a private property - also new. As a result, it is no longer enough to own a home, but to own it first-hand, for it to qualify as a proper status symbol.

These sentiments sometimes override plain economics. For example, after the Asian financial crisis, prices of HDB resale flats declined while prices of new units in far-flung new towns were not lowered. One would have expected an overwhelming majority to choose resale flats. Not only do they represent value for money but most are in well-located mature estates, unlike new flats found in outlying areas such as Sengkang and Punggol. However, anecdotal evidence suggests there are more than a few households who continue to opt for a bare, new HDB flat.

There is another reason why new properties command a higher price. Part of their demand comes from speculators, at least for the duration of the construction. The larger the project and the more phases it has, the longer the property can retain its perception of newness. It is also much easier to spin a story to entice a potential buyer to pay a higher price as it is difficult to verify anything before the project is completed.

If we look at the URA statistics for terraces, the percentage rise over the same seven-quarter period showed prices of completed terraces rising by 0.5 per cent, marginally higher than the 0.2 per cent rise for uncompleted units. As we know, foreigners are not allowed to buy landed properties without approval. There is also less speculative activity for terraces.

At the end of the day, it all boils down to the buyer's preference. If you prefer your property to be new, then be prepared to pay more. However, if you are not bothered by such frills, you will save yourself some money.

A friend recently called from a showflat about a $950,000 apartment. I usually don't interfere with such decisions unless I think the person is making a big mistake. Since this wasn't the case, I fought the urge to give her my opinion. I asked her to consider all the other properties she could buy in the market with $950,000. If she still wanted the apartment after considering the alternatives, then she should go ahead. She did.

The writer is head, research & consultancy, Chesterton International