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Above are two charts of Singapore real estate prices, one from URA, which only started in 1993, another from some real estate firm that goes back another 18 years, though the two are not strictly comparable because of some methodological differences. In any case, both the drastic rise from mid 80s to just before the 97 asian financial crisis, a partial recovery followed by a second slump, from which the market has since recovered, but not from the first slump (though this is the average situation - the high end market has not only recovered to the 96 peak but well surpassed it).

When I moved to Singapore in 83, there was a boom in housing in anticipation of immigration from Hongkong prior to its 1997 reversion to Chinese rule, but it was about to suffer a downturn as the optimism was fading, but soon there was a four-fold rise from 86 to 96 - in fact you can see some hesitation in the rising trend around 94, but several events (the Lee family's well publicized purchase of apartments from Hotel Properties Ltd and buyers from Indonedia were the more significant factors I remember) caused prices to shoot up again, even as the government took measures to cool the market; the 97 crisis soon did not job much more effectively and the slump was long and painful. It was again foreign buyers, Indonesians followed by mainland chinese then europeans and indians, that caused the heat at the high end; the follow through to the mid range had not yet heated up when the US recession and probable China downturn cooled things down again.



above shows Dow index for past 3 and 6 months 

The US Housing Crisis 

Asset valuation has a somewhat circular process; to take an example, some Indonedian and Mainland China investors buy some luxury condos in Singapore, causing a rise in the valuation of all properties in the same category, since valuation numbers are based upon recent transactions of similar properties. This allows future buyers of such properties to take out larger loans, since these are tied to valuations; hence, there is an increase in the amount of money circulating in the real estate market, since previous owners and property companies that sold the condos inject the cash into other projects.A number of previous owners and speculators who have made a good profit would go to buy properties in cheaper areas, causing prices to rise there too, and ...

These are not new phenemena, but two things are different these days; first, information flows electronically, much faster now, and events jump from one to another in the chain faster; second, various new financial products have been formulated that allow previously unknown chains to be formed. For example, banks offer unit trusts, which are a form of fixed term deposit, but instead calculating payback according to principle + interest, the payout formulae are based on some financial indexes or shares/bonds/commodities/etc packages. Since the bank has to make a larger payout if the so used index rises, it has to invest part of the deposit in some products that would provide the rise, and use the remainder in other ways. Thus, a bank customer buying a unit trust produces a chain of financial events, different from the previously known chain of bank deposits being lent out as bank loans. These new chains have different speed and complexity from the older chains.

In particular, the US housing situation was partly caused by such new chains. Most house buyers would go to a mortgage broker, who earns a fee of a few thousand dollars for each successful mortgage applications and has a strong incentive to ensure success, without risking his own money. The mortgage companies and banks do take a risk, but they pass the risk to others by turning a package of mortagages into a financial product held by a investment fund, which passes on the risk to its subscribers. In other words, almost everyone involved in the chain is risking someone else's money, while the final risk taking subscriber is so far removed from the original mortgage application that he has no means to judge whether the risk is worth taking or not. Instead, the investment funds and subscribers rely on credit valuation agencies to apply classification formulae on the funds and mortgage packages. Like real estate prices, the valuation and perceived risk level of any asset is based on similar assets that were recently traded. Hence, a previous unclassified product would get classified to be as good (or as bad) as others similar to it. A cynical way to look at it is "some fool paid X for something like this, so if you also pay X, you are no greater fool than he".

For the past decade, everything looked rosy in the US housing industry; interest rates were low and funding was easy to get. Banks offered mortgages with attractive initial interest rates, and assessed borrowers' abilility to service loans using formulae based on the initial discounted rates instead of the future long term rates, ignoring the risk that when rates rise the borrowers may be financially strained. With generous availability of finance, even people with weak credit histories and modest incomes became qualified to take out mortgages, though at higher rates (called the sub-prime mortgages - which was where the crisis started from). As more people could afford to buy houses, general prices rose, so that if anyone did turn out to be unable to maintain payment, he could simply sell the house and pay back the mortgage, and still made a profit (which he could use to buy another house). The various parts of the chain reinforce each other, thus making it easy to produce a bubble (or to put it another way, an elaborately linked system like this is unstable because any weakening of one link could spread to the whole system)

This happy chain is of course maintained only if interest rates stayed low. For the past decade, despite the economic boom in USA, consumer price index was rising very slowly, because America began to import huge amounts of consumer goods from China at dirt cheap prices, with Walmart's growth to be the world's largest company tied at least partly to this. It was, however, misleading to say that inflation was low throughout the period, because house prices were rising rapidly in the last few years. Adding to the rise in share prices, there was clearly asset inflation present. Once interest rates rose and house price increases got disrupted, a reverse chain began to set in: people whose income were insufficient to service their mortgages under the new interest regime could no longer simply sell the properties, while new buyers were harder to find because of greater difficulty of qualifying for loans. This causes the market to cool further, and the mortgage backed securities to lose value. Financial institutions involved in the mortgage process chain found themselves facing losses, and reduce their funding of future mortgages and related securities, making loans even harder to get.

We are only at an early stage of this crisis, but not only is the crisis in housing itself going to be severe and long, its infection of the rest of the financial system and economy generally will also take much time to work through.

added pm 25 Nov 2007

visiting the palo alto area, I was looking at its real estate situation; the following might be of interest,CA/foreclosure_lt

out of the website's list of available properties: Click below to see a set of reports of recent collective sales)

Enbloc or collective sales for condos, in which a property developer buys up all the units of a condo in order to re-develop it (usually by demolishing the existing units, building a larger number of new condo units on the land, and selling them to new owners), can take place anywhere that has condos, but Singapore is unique in having such a large number of them and making them so lucrative.

The lower part of the photo on the right shows Gillman Heights, a condo with probably 6-700 units mostly owned by my former employer National University of Singapore, that was recently purchased by local property company Capitaland, at close to one billion Singapore dollars. This price level was previously considered to be a mission impossible, and its success has encouraged other large condos to organize collective sales of even larger scales. A couple of days ago we heard that Farrer Court is setting an asking price of $1.5B. (added in later June 2007: Capitaland agreed to pay $1.3B, and now the Gillman owners are regretting they sold too low - Farrer Court is shown in upper part of picture).

For each collective sale the price an individual owner obtains is generally much higher than the condo can fetch if sold individually, which reflects the condo's utility as a residence rather than its share of the land value as reflected in a property redevelopment.Why is there such a big difference between the two? Normally, a property is redeveloped because it is old; rebuilding it increases utility because living in it becomes more pleasant. However, this is a rather minor factor here, and the main cause of the "redevelopment premium" comes from increased construction density for the new property, or "plot ratio" - the amount of built-up area a piece of land is permitted to have in the building approval. For example, if the land for the property is 10,000sqft in size, and the plot ration is 3, then the finished property is allowed to have a built-up area of up to 30,000sqft. If the existing building only has 15,000sqft (say 10 condos of 1500sqft each), tearing it down and rebuilding allows 20 condos 1500sqft to be constructed and sold. In other words, the existing property underutilized the land's developmental potential, and its individual sale value reflects this. To obtain full benefit, a property developer must buy up all the units, hence the higher price fetched in a collective sale.

Town planning in Singapore is done by the Urban Redevelopment Authority, which makes decisions about which pieces of government land are made available for property development, what type of building (residence, office, hotel, factory, shopping centre, etc) may be constructed on a piece of land, height restrictions, and of course the plot ratio. Similar decisions are also made about privately owned land, including pieces that already have buildings on them, in the event of re-development. Many old (the first condos came into being in the 70s so "old" meant 20-30 years only) condos were constructed with fairly low plot ratios imposed in earlier town plans. In anticipation of population increases and higher levels of private home ownership, these ratios were revised in a new master plan announced in the late 80s, thus creating scope for this re-development premium. However, the actual amount of this premium was dependent on the level of property prices. When these spiked in the late 80s and early 90s, collective sales began to merge as a phenomenon. A housing slump occurred in the mid-90s, prolonged by the 1997 Asian financial crisis, 2000 Nasdaq meltdown, 2001 WTC terror attack, 2002 SARS crisis, and it was around 2004-5 when property prices began to rise, starting in the new luxury developments downtown and Sentosa island. The enbloc phenomonon then restarted with a vengeance, far surpassing the early 90s level both in the number of condos going enbloc and in the prices fetched.

In fact, previously the phenomenon only applied to condos on land held on permanent title (freehold land) or 999 year lease land, whereas recent land allocations had shorter titles, most residences being sold on 99 year leases, which used to have a question mark over them "would banks lend money for properties that only have short remaining land leases?" This issue was resolved when such leases can be "topped up" in a re-development permit application, i.e., land with 99-x year leases can be re-classified as 99 year leases by paying a fee reflecting the current land values and the size of x. Hence, 99 year lease condos also started to have collective sales after the 2004-5 propert market recovery.

A collective sale can be organized in two ways. For a small condo (say not more than 20-30 owners) a property company can make a purchase offer to each owner, subject to all other owners agreeing to sell to the same buyer. A down payment is made only after all owners sign, and if this does not occur by a deadline the deal is off. Here the tricky issue for owners is whether another buyer may be around willing to pay more. For most condos, competitive bids are invited, but first the owners need to sign a collective sale agreement certifying their willingness to sell to the highest bidder, with various conditions such as a minimum bid price. Go there to see search items on this topic

To make it easier for older condos to organize collective sales, only 90% or 80%, depending on the age, of owner votes are need to make a collective sale agreement valid, binding on even those do not sign if endorsed by the Strata Titles Board. But even then, it is still possible to create a "last aboard" premium: the collective sale agreement is short of just one more owner, and someone is willing to join in but only at a higher price. In order to ensure success, the signed owners might be willing to each contribute a small amount to be paid to the last aboard owner. There have also been other cases of one owner holding out, either preventing the minimum sign-up level from being met, or refusing to move out even after the sale has legally gone through, for non-monetory reasons, but this is rare. More commonly the argument is over what formula to distribute the proceeds - in a small condo where all units are the same size and approximately the same market value, there is usually no problem, but other situations are more common. The other issue is how aggressive the marketing should be: if a high minimum price is set, the chance of selling too cheaply is avoided, but make make the collective sale non-viable.

There have been cases of a group of owners unhappy about the collective sale committee appointed by the condo management corporation (usually the estate managing agency would have property sale people handling the collective sale on behalf of the committee) decided to form a rival sale committee assisted by a competitor property agency. Getting the minimum required number of signatures within the prescribed time period for one collective sale is hard enough; doing so with a competitive operation going would be much harder, so the most likely outcome is that neither operation would achieve this.

For example of potential enbloc, see Astrid Meadows


Home purchase in Singapore - A brief Note

Residential properties are classified into three types: landed, with the owner holding an individual land title, condos in which individual owners (or subsidiary proprieters) have exclusive right to use part of the property and shared right to use the common areas (often including recreational facilities), and apartments which were developed under older rules and usually have limited shared facilities. Landed properties may be free standing (bungalows or detached), conjoined in a pair (semi-detached) or joined in a row or 3 or more (terrace houses).

Land titles maybe perpetual (or freehold/fee simplex) or leasehold; virtually all the land recently released by the government for residential development was on 99-year leases, but a small number of older condos had 999 year leases. Generally, freehold and 999 year lease properties command a price premium of about 20% over 99 year lease properties of similar quality and location.

Most people require a bank loan covering 80-90% of the cost of the property; they repay the load over a number of months using their disposable cash and withrawals from their compulsory  savings account with the government provident fund. This makes both the bank and CPF mortgagees of their home. As the amount they owe to the bank drops, their debt to CPF increases, often faster than the bank loan decrease because withdrawals must also cover bank interest. Couples usually jointly own their home and use their combined disposable income and CPF savings to repay the bank loan, so that each is in debt to the two mortgagees.

Procedurally, the actual purchase starts with a 1% payment in exchange for a two-week option agreement; that is, the seller gives the buyer a signed purchase agreement and promises to reserve the property for the buyer for two weeks in return fro 1%  of the agreed sale price. If the buyer decides to proceed with the purchase, he pays an additional 9% to complete the down payment and signs the purchase agreement. Normally, the cheque and the signed agreement are given to his lawyer to forward to the seller's lawyer.

The buyer's lawyer then goes through a conveyance procedure, beginning by lodging a notice (called caviet) with the land registration office that someone has bought the property. Next he checks the seller's rights regarding the property, e.g., whether the seller actually is the owner, and if so, how he got the property (e.g., if he received as a gift, then if within 5 years of the giving the giver dies or goes bankrupt, the government/creditors may be entitled to pursue the gift to recover tax/debt), whether there is a mortgage on the property giving the bank rights over the property, whether some of the land might be acquired by government for other use, pre-existing restrictions on the use or disposal of the land/building, etc. All these can potentially affect the buyer's rights.

Assuming no impediments were found, the sale is said to be "legally complete", usually within 3 months of the signing of the sale agreement by the buyer. The land office then issues a new title certificate in the buyer's name, though the document is normally retained by the mortgage holder till the debt is paid off.

Historically real estate prices rise, and with the owners only making a small downpayment at the start, a quick capital gain is proportionally large compared to their investment. This has tended to tempt people into over-committing to larger/more expensive properties in the expectation of higher capital gains, unaware of the risk in the event of a economic downturn when property values can drop below the loan amounts leaving them in a negative asset situation. If they get retrenched, they can have serious difficulty servicing housing loans and end up losing their home and all their past savings.

The Asian eonomic crisis-911-SARS recession, extending for close to 10 years (if you add in the 95-97 period when government measures to control property speculation had already started to cool down the market), is now truly over, and some areas have seen property prices rising to unheard of levels, driven mainly by foreign money. While a year or two ago luxury condos here might still look cheap compared with NY, London, HK, etc., today it is hard to say so. In the mean time, the government is keeping a close watch. It is clearly not wishing to see another bubble, whose bursting can bring on another recession.