Why Do People Still Buy When The Price PSF Is So High?

hollandproperty — Sat, 07 Mar 2020 12:26:14 +0000

4 Reasons Why People Still Buy When The Price PSF is So High

Thanks to the hot response toward launches like The M condo at Middle Road, and Midtown Bay at Beach Road, this has become a more common question of late.

A lot of people are shaking their heads and asking why people would buy when the price PSF is so high? Prices PSF can be as high as $2,450 PSF, or even $3,000 PSF (as indeed, are the going rates for many units at The M and Midtown Bay).

Another assertion – which is not always correct – is that these people are getting a “bad deal” by buying at such a cost.

Well, if you are fixated on the price PSF, you will probably not buy a new launch today.

A New Norm

Consider the average price PSF of these new launches:

Stirling Residences $1,849 PSF (72.44% / 912 units sold)
One Holland Village Residences $2,685 PSF (40.88% / 121 units sold)
Fourth Avenue Residences $2,391 PSF (24.16% / 115 units sold)
Sengkang Grand Residences $1,745 PSF (216 units sold on launch day)

These are not even freehold projects. In fact, you can buy resale freehold apartments at a lower price PSF.

You can get a unit along Holland Road at The Ford @ Holland (freehold) for less than $2,000 PSF, compared to One Holland Village Residences (99 year LH) which is 34% more expensive in terms of PPSF.

Or you can buy a unit at Cascadia (freehold) for less than $1,800 PSF; whereas Fourth Avenue Residences (99 year LH) is selling for almost 33% more.

Even Piermont Grand EC has already crossed the $1,000 PSF barrier.

Many people recoil at the incredulous price PSF level.

Price PSF Will Continue To Rise

In a research report released by DBS on 16 May 2018, it forecasts new private homes to cost between S$2,300 and S$2,900 PSF on average by 2030 – sharply higher than the current S$1,500 PSF.

It may sound absurd, but we are on track towards that price level.

There are at least 4 reasons why people are still buying even though the price PSF is so high:

Consider how returns and rental yields are calculated
Quantum matters more for affordability
The difference in the layouts between new launches and resale condos
There are many more important factors than just the price PSF

Reason #1: Consider how returns and rental yields are calculated

Sometimes, a buyer does not buy an apartment unit for own stay, but to rent it out. Alternatively, some buyers may see a small condo unit – such as a two-bedder – as a stepping stone to something bigger. They may not intend to stay on beyond four or five years, and just want to make some gains in resale.

In both these situations, remember that the price PSF does not directly impact their yield or return.

Rental Yield

For example, say you buy a large, older unit that costs $1,200 PSF, but with a quantum (total cost) of $1.6 million.

At a rental income of $42,000 per year, your gross rental yield (annual rental income divided by cost) = 2.6 per cent.

Now, say you buy a small, newer unit at $2,450 PSF. The quantum is $1.2 million. The rental income is a little less as it’s smaller: $38,400. The gross rental yield would be ($38,400 / $1.2 million) = 3.2 per cent.

Notice that the price PSF has no bearing on the rental yield. It’s possible for a small unit bought at a high price PSF to have a much better return than one with a lower price PSF, simply because you have to invest less to earn that rental income.

This is why some landlords – who buy small units to rent out to single or couple expatriates – may shrug off a high price PSF. They are more interested in a low quantum, coupled with a highly desirable location.

(But if they’re choosing between different units in the same development, which are roughly the same size, then they may look at the individual price PSF to decide which is better value).

It’s possible for a small unit bought at a high price PSF to have a much better return than one with a lower price PSF, simply because you have to invest less to earn that rental income.

Capital Gains

The same concept applies to your eventual returns when you sell. If you buy a unit at $1 million, and sell at $1.1 million five years down the road, then your capital gain is 10 per cent – your price PSF is not relevant.

So again, an investor is often more concerned with a low quantum, and an excellent location with a lot of room for appreciation. If they can tick those boxes, then they may look past the high price PSF.

An investor is often more concerned with a low quantum, and an excellent location with a lot of room for appreciation

Reason #2: Quantum matters more for affordability

When the bank is calculating your Total Debt Servicing Ratio (TDSR)*, and you are working out your down payment (minimum of five per cent in cash), the price PSF is not a factor.

For example, to buy a $1.5 million home, you need a minimum of $75,000 in cash. It doesn’t matter if the house is $3,000 PSF or $1,500 PSF; you still need the $75,000 if the quantum is the same.

Likewise, the monthly home loan repayment is based on the amount you borrow. If you borrow $1 million, and your home loan repayment is $4,700 a month, then that’s what you’ll pay; the bank doesn’t care whether your unit is bigger or smaller for that amount.

*Under the TDSR, your home loan repayment, plus any other outstanding debt repayments, cannot exceed 60 per cent of your monthly income.

The amount of loan bank can give you decides what you can afford to buy, which is more important than the price PSF

Affordability in a Desired Location

As such, many home buyers of new launches know that the price PSF is high. They may not mind, however, so long as it means having an affordable home in a place they really want to stay or an investment property they can rent out for good yield.

Buyers at Midtown Bay are aware they’re paying a high price PSF – but it may be the only affordable way they can have a home across from Bugis Junction.

Even if they were to find units with a lower price PSF (and there are many in the Bugis area) the typical home price for a District 7 property was around $3.4 million in 2019.

A Midtown Bay unit at $1.4 million may be the unit within their reach, whatever the price PSF.

Reason #3: The difference in the layouts between new launches and resale condos

Penthouses

A penthouse unit and a ground unit are usually the lowest in price PSF in the same development.

If you buy a penthouse, it usually has a big open roof terrace. Not forgetting the staircase to the upper level also eats into the floor area.

Ground Floor Units

As for a ground floor unit, it usually comes with a big private enclosed space (PES).

All these floor areas are tabulated in the floor size, and they make the price PSF look very cheap.

Double Volume Ceiling or Void Area

If you consider projects like Trizon and Trilinq, which seems very spacious on paper. But you may not realise that the sizes quoted include ‘air space’ or void area because of double volume ceiling in part of the apartment.

If you are not discerning, you may think you got a good deal at a very attractive price PSF.

But what can you do with the ‘air space’ which you paid for it?

URA New Regulations

Since 17 January 2019, URA has imposed some new regulations:

the total balcony area(s) for each unit will be capped at 15% of the nett internal area to ensure that the balconies are not disproportionately large relative to the main unit.
each balcony is to have a minimum width of 1.5 metres as measured from the external building wall to enable it to function as a meaningful outdoor space.
developers are given a maximum of 10% bonus Gross Floor Area (GFA) over and above the Master Plan Gross Floor Area (MP GPR). That means developers no longer have any incentive to build oversized air-con ledges, PES, open roof terraces and bay windows.

Efficient Space Layout of New Condos

Because of the new URA regulations, the new developments have a much more efficient layout than the older ones.

A 936 SF 3-bedroom unit at Gem Residences may feel as spacious as a Trevista 1,270 SF 3-bedroom unit once you take away the bay windows in the bedrooms, living room, planters space, air-con ledges, over-size balcony and bomb shelter.

So while a level 10 936 SF Gem Residences at $1.366 million ($1,459 PSF) is more ‘expensive’ than a level 10 1270 SF Trevista at $1.72 million ($1,354 PSF) in terms of price PSF, the quantum is not only lower but also you paid for more useable space.

There are rooms in some condos that cannot fit in a double bed. They are more like study instead of bedrooms.

The new launches, while higher in price PSF, give you more efficient layout with lesser wasted space. You may end up paying a lower quantum for more useable space

Reason #4: Price PSF doesn’t take into account many more important factors

Consider this: there are two same-sized units in the same project. One is going for $1,500 PSF, the other is going for $1,450 PSF.

Does it mean that the unit priced at $1,450 PSF is a better bargain?

Facing, Level and View

It’s possible, and you should definitely take a closer look. However, it’s also possible that it’s priced lower because it has a view of the next block, rather than pool view or an unblocked view.

It may have a layout that’s awkward or less desirable (e.g. an L-shaped layout that doesn’t permit good flow of natural light). Or it may be directly facing the MRT track (this can cause the windows to vibrate slightly whenever the train roars past). If you are buying to lease out, you may have a problem getting a tenant who can tolerate the noise.

High Floor Units Are Not Always Worth Paying For

There is also no good reason to pay a higher price PSF for a high floor unit if there is no view that justifies the higher price tag. If you are looking into another block or building, a low floor or high floor unit does not really make a difference, except in price.

If you are paying a premium price for a pool-facing unit, ask yourself if it’s worth paying higher price PSF for a very high floor unit where you can only see the pool when standing at the edge of the balcony? And the higher you go, you smaller the pool appears. Why not pay a lower price PSF instead, for a unit on level 3 to 5 where you can enjoy a pool view while sitting down in your living room?

If you are paying a premium price for a pool-facing unit, ask yourself if it’s worth paying higher price PSF for a very high floor unit where you can only see the pool when standing at the edge of the balcony?

So, while it’s reasonable to look for a price PSF below the median (within the same development), you need to be cautious in scrutinising why that’s the case. This can be especially hard for new developments, where you have nothing to go by besides show flats and the floor plan. This is where you need an experienced agent to help you spot the best stack with the best value.

I can help you to analyse a unit that has an unusually low price PSF, and to spot some less obvious problems. Like me on Facebook and drop me a message; we can look over the floor plan together.

Conclusion

I hope this clears up why some buyers are okay with a high price PSF.

Please don’t ignore the price PSF, as it can still be a useful indicator of value. But at the same time, don’t be so focused on finding a low price PSF that you neglect other key factors.

In general, I find that genuine home buyers should focus more on the quantum. It’s more important to ensure you can comfortably afford your home, than to buy a big, overly-expensive house that will leave you financially stretched.

When in doubt, contact me for a non-obligatory discussion. I’ve helped home buyers of all stripes in Singapore find their dream units; be it for their own stay, or as a long term asset.

Need an opinion on your property investment plans? Want to know the value of your property? Or need help to sell or rent out your property?

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Danny Han has always been in the people’s business, having spent 23 years as a church pastor, five years as an insurance agent, and the last 16 years as a property consultant.

Danny has a genuine interest in people and firmly believes in personal integrity. While helping homeowners with their property needs, their interest always takes precedence over his personal gains. Hence, Danny has consistently earned his clients’ complete trust and loyalty. Many of them have become his personal friends.

Danny received his Diploma in Mechanical Engineering from Singapore Polytechnics and Bachelor of Science from Oklahoma Christian University of Science and Arts in Bible & Psychology.

Besides keeping abreast of the property market trend and constantly equipping himself to better serve his clients, Danny is a passionate foodie, a weekend cyclist, and an avid hiker.

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