The title of this blog post is not meant to be sarcastic. It is about human nature to follow the herd, especially the irrational urge to buy something when prices are high.
A second-hand HDB home for over a million?
Our local media have the tendency to report properties that were recently sold at an unbelievably high price. Or the purchase price had just set a new record. These stories never fail to catch our attention. Most importantly, they work like magic to help property agents to close their next deal.
That’s why we have exciting property headlines every week: “49-year-old HDB terraced house in Whampoa sold for record $1.268 million”, “Five-room Bishan HDB flat sold for record $1.295 million”, …
Think about it: These buyers are not making easy money from venture capitalists, IPOs or speculative stocks and cryptocurrency. Instead of splashing on luxury penthouses or Good Glass Bungalows, they are only buying a second-hand 99-year HDB flat.
Are they dumb, or have we missed something here?
1. Bishan HDB flat for $1.295 million
Two weeks ago, an interesting headline “Bishan HDB flat sold for record $1.295 million” popped up. This set the stage for special property features such as “Million-dollar HDB flats: Half of S’pore’s 24 towns have them”.
The buyer could be carried away by the unblocked city view or extensive renovation by the previous owner. But it still doesn’t justify paying over $1,000 psf for a 10-year-old 1,290 sq ft public flat. With that budget, the buyer can easily find a condominium unit in the same district, say in Grandeur 8, Seasons Park or Castle Green. They are all with close proximity to the MRT station, equipped with full facilities but under $1,000 psf.
2. 49-year-old Whampoa HDB terrace house for $1.268 million
In June, a homebuyer bought a 49-year-old HDB terraced house in Whampoa for $1.268 million. Immediately, The Straits Times article came up with the article “HDB terraced houses: Where are they, why are people buying them, and is Sers a possibility?”
A home purchase is something personal with willing buyer willing seller. However, we don’t expect many willing to pay $1.268 million for a 49-year-old HDB terrace house.
For low-budget homebuyers interested in landed living, there are many private terrace houses with similar age. They are in better locations and selling from a few hundred thousand to a million dollars. Above all, they are private landed houses free of HDB restrictions. Owners can rebuild or renovate the house to their own taste. After all, they own the actual piece of land under their house.
Back in 2009, a homebuyer also bought a 2-storey HDB terrace house in the same location. But it was purchased at a much lower price of $418,000. It was less than a third of $1.268 million. Although the size was smaller, the terrace house was 12 years newer and 12 years longer on the 99-year lease.
Honestly, the possibility of SERS for old HDB terrace houses is low. For close to 50 years, the Housing & Development Board has been building high-rise blocks rather than terrace houses. Take the hint from the first ever Singapore property with its lease expired end of last year. The 191 private terraced houses in Geylang Lorong 3 were returned to the state with no extension and no compensation. When time is up for this 49-year-old HDB terrace house, there will likely to be no time extension and zero compensation.
A fresh pineapple for $9,400?
How much will you pay for a fresh pineapple? You can buy at NTUC from $2.5 or at Cold Storage for $5. Once I bought a big pineapple from a Johor fruit farm for RM1. Of course, you may pay more for pineapple decorations for auspicious reason during Chinese New Year.
What if I tell you that the fruit used to cost today’s equivalent of £5,000 in the 17th century? That is over $9,400 for a fresh pineapple! You should buy them in bulk from a fruit wholesaler. Then ship them to 18th century Europe through the time tunnel. Sell 107 fresh pineapples and you are an instant millionaire!
This is a true story retold in the book Why We Hate Cheap Things. Back then, only the royalty could afford pineapples. Owning one was a status symbol. It would be showcased in a prominent place until it rotted. At the peak of the pineapple craze, a 14-metre-high giant stone pineapple was built on top of a two-storey Scottish estate.
However, the good times of pineapples ended with mass production of the fruit in large plantations. The world invented steamships for timely delivery of fresh fruit. Anyone could buy a fresh pineapple from the market. There was nothing exotic or exclusive about pineapples anymore.
3 myths why we only buy when prices are high
Why prices of new condominium projects are easily 50 percent higher than the market price of private development in the same area? Because developers need to factor in the highest possible rise in property prices five years from now in order to make the maximum profit. A more important reason is: Homebuyers are not interested to buy anything cheap. In reality, the higher the selling price, the better.
The same is true for second-hand properties. And when prices go higher, there will be more people buying. Because the higher the prices go, the more the buyers are afraid of missing out.
Myth #1: There must be a reason why it is sold at a high price.
Sellers and marketers understand that they don’t need a valid reason when they set prices at the highest possible level. A high price is justified because of buyers’ false hope, wishful thinking, or pure speculation. That is why prices of bitcoin keep escalating when there is no wide circulation of the virtual currency in any country. And that is exactly how do banks come up with such high valuations before IPOs when those companies have never managed to make any profit since inception.
A good story to prove that human beings are idiots in front of valuation. We can’t tell the intrinsic value of things we intend to buy or invest.
– Why We Hate Cheap Things
Similarly, we trust developers and owners must have good reasons to justify selling at such high prices. If we believe that everyone is doing something, it can’t be wrong.
Why do Singaporeans like to follow the herd? Because our mentality is: If everyone is going for it, it must be good. If everyone says it is good, we also want the same thing … Many buyers lack the ability to think for themselves and differentiate whether the information presented to them is true or false. Instead of evaluating risk and return, they go along with others, thinking that it is safe to follow the majority. And the herd goes around like parrots repeating what everyone else is saying.
– Vina Ip, Behind The Scenes of The Property Market
Myth #2: High prices are justified by rarity.
We are not only idiots when it comes to valuation. We are also fools who believe that prices will definitely go up whenever marketers tell us that something is scarce in the market.
Vendors can make a weird product, position it as “limited edition”; and give it a high price tag. They know that speculators are keen to get hold of them, then resell or auction them at much higher prices.
This formula work most of the time. Few consumers question the fact that, despite the rarity, whether there exists better quality, additional benefit or special service that justifies the high price. After all, whether something is expensive or cheap is subjective and relative. Good value only lies in the eye of the beholder.
Does scarcity guarantee increase in value? Penthouses are rare in any development. They are sold at a premium at new launches. But why are they the most difficult unit type to sell in any resale project? Why do they end up as mortgagee sale in auctions? How can Dyson’s most talked about penthouse in town incur a $11.8 million loss in just one year?
Myth #3: Prices are higher because there is market demand.
Obviously, the saying contradicts with the second myth. Whenever there is a big enough demand for something in the market, suppliers will react quick to satisfy the demand with mass production. Once something is no longer scarce, prices will drop. Soon supply will exceed demand. When the market oversupplies what you own, the value of what you are holding will plunge. Such is the fate of those £5,000 pineapples.
It is the same for properties. When prices are too high and there is lack of buyers or speculators in the market to support them, prices will correct on their own. Just see how prices of Hong Kong commercial buildings returning to the level of two decades ago.
Busting the “prices are high” myths
Step out of that scarcity mindset. Forget about sales talk of pent-up demand or limited supply. Look at the hard numbers from URA 2nd quarter 2021 real estate statistics.
If there is pent-up demand, why is there 6.4 percent vacancy rate for completed private residential units and 9.6 percent vacancy rate for homes in the Core Central Region? If there is limited supply, why are there still 21,055 units remained unsold and a huge quantity of 51,210 units in the supply pipeline with planning approval?
Where is the market demand coming from? Are we opening or closing the immigration gate for foreigners to keep unemployment rate low? Are we having a growing or shrinking home purchase population with low fertility rate and an aging population?
Why we won’t buy when prices are low
Some people said that I was lucky to invest in properties in the mid-2000s. But many people also had money to invest back then. Why were they not buying? In fact, I heard a lot more negative comments than encouraging remarks during that time. The common ones were “it is too risky”, “prices will only be falling”, “it’s not the right time to buy now”. I still recalled the look of contempt on their face whenever I talked about property investment.
I could recall the look of contempt on their face whenever I talked about property investment. However, when prices went up, they wonder why they didn’t buy when prices were so low. The reverse is true. Some years after they bought at the peak of the market, they wonder why they had bought at such high prices.
We all rush to buy when prices are high and will be high for some time. When prices are low and will be lower for some time, we lose interest.
– Why We Hate Cheap Things
The truth is: We won’t be excited by things that have become inexpensive. Because when there is a big reduction in the cost of something, there will be a corresponding reduction in our esteem of owning it. We hate things when they become cheap, though we don’t admit it.
It’s fine. I don’t need any endorsement or reassurance other property buyers or strangers, especially from the media. When I find a good deal, I would rather keep quiet. If many people know, it won’t be a bargain anymore.
Fortunately, the media only report amateur buyers who just overpaid for something, not savvy investors who just bagged a great bargain.
But savvy investors don’t mind sounding it out when it’s time for them to sell. Just like marketers will make every effort to talk up the market when they have to sell. That’s when you read familiar headlines in the news, for examples, “xxxx a bright spot for property investment”, “xxxx a hidden gem with pent-up demand”, “demand for xxxx turns positive”, “xxxx market recovery in sight”, “investors flock back into the xxxx market” …
Food for thought
My good friend in Hong Kong has been saving hard to invest in gymnastics training for her only child. The primary one girl is the youngest in the talent team of the Gymnastics Association. Her dream is to join the national team to compete internationally. But people told my friend that it will be a difficult path for the child. It is more practical to be in the academic stream.
Then the Hong Kong team overperformed in this year’s Tokyo Olympics. They won a total of six medals – one gold in fencing, two silver in swimming, and three bronze in table tennis, karate and cycling. Then the same people said maybe her daughter can help Hong Kong to win the first Olympics medal in gymnastics one day.
Who cares what others say? If you are sure it’s the right thing to do, there is absolutely no need to seek confirmation from others.
If you need advice on property matters or residential properties in Singapore, you can check out my personal consultation service.
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Ironically the “want” (rather than need) to buy is because some (not all) of these people own only 1 home and they sold it (eg fulfilled MOP or whatever ….. & hopefully at a prevailing mkt price) hence a replacement home must be found (hence sell high, buy high conundrum). For people under such category, it is whether the buying (now) decision makes sense and done in rationale fashion (from my years talking to people around me … such people forms probably less than 5%). Of course, exposed to other un-intended consequences if chose to rent in the interim and hope prices fall later
Other categories of people buying during current mkt situation (in whatever ownership permutation) …… well, herd mentality /FOMO is the name of the game.
I could be wrong; many refuse to accept “the wind have changed course for good”.
You are right. Sometimes it’s difficult to get those outdated conventional wisdoms out of the mind of people, such as “property prices will always go up in Singapore”, “renting is throwing money away”, “freehold must be better than leasehold”, etc. I was not raised in Singapore so my parents haven’t put these into my brain. I have seen how property prices climb and plunge in different countries over the years. So when it comes to committing to an investment with my hard-earned money, I only trust the facts and numbers.
Agree with this article. FOMO is the main emotion driving most people when buying properties at high prices.
Yes, we are cultivated to be so afraid of missing out that we end up missing the full picture.
“The fear of missing out on things makes you miss out on everything.” – Etty Hillesum, Dutch writer
Any idea why the rental market are also booming ? I been trying to get a older condo unit but prices are sky high now . Rental prices are also raising everywhere and good units are gone in a flash . Where does all these renters come from when our borders are still close?
It is exactly because the border is closed so Malaysians are forced to stay and rent in Singapore. Also, many Singaporeans manage to sell their HDB and private homes and are renting for the interim period. Don’t go where the Malaysians and locals are renting.
Are you sure rental prices are rising “everywhere”? In 2nd quarter 2021, URA told us that vacancy rates of private residential units in CCR, RCR and OCR were 9.6%, 5.6% and 5.2% respectively. Do you get the idea?
Thanks Vina. Your comments on Singaporeans taking this opportunity to sell as markets are quite robust now are spot on. I lived in Bedok reservoir area and rents are in general going up from Bedok area to Tana Merah area. ( That has been my experience the last few months looking for rental units. I sold my place so am renting during the interim basis while I decide on next steps ). Am just very surprise that rentals are going up around this area as well 🙂
I learned from the field that District 15 and 16 are now where the “mob” rush to buy and rent. Good luck!
Wow didn’t realise CCR vacancy is so high! 9.6% vacancy rate means 1 in 10 apartments are empty? And this only counts those apartments where the owners have turned off the PUB utilities.
I’m curious whether Singapore has had a net inflow/outflow of high earning foreigners in the last 1 year. These are the people who will typically be renting in CCR. Are there any data points on this?
Have a look at rental listings in District 1, 2, 9, 10 and 11. Condo rents have become very reasonable and negotiable compared with those in Singapore’s neighborhood districts. PropertyGuru shows among the 1,111 units in The Sail@Marina Bay, there are currently 322 units for sale and 327 units for rent.
We don’t keep track of the housing arrangement of non-resident or foreigner households here. But there is hardly enough replacement of new expats after their previous ones left. How to convince Malaysians who are stuck in Singapore under border control or Singaporeans who just sold their BTO flats to rent near the CBD or the prime districts?
I just sold my HDB & renting now, not because I am waiting for property price to drop (I do hope so..) but because of children’s schooling. Sometimes I do feel a bit worried as condo prices seem to be going up day by day, but I also remind myself that worst case scenario I will just go back to HDB again.
I buy for own stay, so private property is more of a want than a need for my family.
If you and your family feel comfortable, it doesn’t matter where or whether you are buying or renting. Who are living in the house is much more important than what they are living in.