What drives private home purchases ...

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What drives private home purchases ...

by Ong Kah Seng

04:47 AM Jun 10, 2011


Private home purchases reached record highs last year and have continued to remain strong this year. Indeed, had the Government not imposed the fourth round of property market cooling measures in January, the home buying frenzy might have hit unsustainable levels on rampant speculation.

One often wonders what drives the buying fervour. Given the euphoria, could traditional demand drivers have changed in recent times? Home buyers' psychology could have been affected by structural transformation in the society, economic development and lifestyle progression.

Traditionally, there are three main reasons why people buy private residential property - upgrading, investment and speculation.

The first group consists of those who wish to move from public flats to private homes to meet rising housing aspirations for the family. These Housing and Development Board (HDB) upgraders often look to own a private condominium for long-term occupation.

Meanwhile, there are those who already own a private home for occupation but are still financially able to afford additional properties with investment potential. This investor group includes singles who are well-established in their careers and are well-versed about the intricacies of property ownership and investments. Some singles are able to invest in multiple properties as they are financially "commitment-free" and private homes are seen as an attractive option for wealth accumulation.

Finally, there are speculators who seek to time property acquisitions and disposals to maximise capital gains. The recent decade has seen the evolution of speculators to "specuvestors" - essentially those who have the ability to hold residential properties for investment, although their ultimate motive is speculative gain.

ROBUST DEMAND FROM OWNER-OCCUPIERS

In the latest round of cooling measures, speculators and investors have seemingly been priced out due to the imposition of harsh sellers' stamp duties and lowering of the loan-to-value ratios. New home sales in the first four months of this year, however, have been healthy even if moderated. The common interpretation is that there is robust demand from owner-occupiers, backed by a fundamentally sound economy and lots of liquidity.

What can we read into this sustained owner-occupier demand? What is the mindset of these buyers? There are key new societal underpinnings that have led to an increasing desire for long-term private home ownership. They have driven buyers to private homes beyond the conventional reasons of property ownership.

A BY-PRODUCT OF PRESSURE

While it is very common for an HDB flat owner to upgrade to a private home for a better living environment, the decision may not be a rational one among all upgraders There may be some who buy beyond mere housing aspirations and financial ability, feeling that a private residential address could reflect a status elevation among colleagues, peers and relatives. Such buyers need to reflect on the worth of doing this and to proceed with such a decision only if a property's potential can be identified.

MAXIMISING WINDFALL FROM CURRENT PROPERTY

There are also some who see the upgrade from an HDB flat to a private home, or from a private residential property to a better one, as an opportunity to realise the price appreciation of the current dwelling unit. The buyer may be making use of this windfall for another property, which can potentially appreciate and add to his wealth.

But this group of buyers should critically assess the risks, especially whether the newer property can deliver comparable returns, as well as the further financial commitment to a costlier property.

Each property is unique and future market conditions may be radically different with new underpinnings. The success of the current or previous property may not necessarily be replicated and a shrewd property buyer will have to be forward-looking instead of placing his bets based on historical achievements.

ENTICED BY PRODUCT INNOVATIONS

New residential properties are often bundled with sophisticated product design and innovations, which attract home buyers. If there are sufficient comparable properties in the vicinity, the home buyer can determine the price premium for such features. In the absence of sufficient comparable developments, the home buyer can ascertain the worth of such features based on general market sensing or, at the very least, how critical these features are. While new concepts are not tried and tested and require more confidence from higher risk-takers, consumer taste is increasingly sophisticated and there is potential for these products.

SENSE OF BELONGING

Intense competition in the marketplace and the workplace has raised the stress levels of many white-collar professionals. Some of these see a private home as offering the soul an intimate connection after working hours. Instead of spending personal time at lifestyle establishments, they choose to relax in a dwelling they call their own.

Moreover, there are many singles who yearn for a place of their own but are disqualified from buying an HDB resale flat because they are under the age of 35. Other young singles may see a private property as a better match for their housing expectations. Such buyers are likely to purchase smaller units and can compromise space for price and functionality.

AS AN OFFICE ALTERNATIVE

Private properties can also double as feasible home offices. Many small businesses see a private residential location as an appropriate business address compared to HDB flats. With rising entrepreneurship and higher retail and office rents, business owners are increasingly recognising the pay-offs of owning a property versus renting business premises. Some private residential properties - especially smaller apartments and SOHO units - have thus found their niche from such buyers.

CONTROLLING PRESSING DESIRES

Whether the motivation is aspiration-led or needs-driven, the potential home buyer will have to ascertain his financial capacity and critically examine the potential and benefits of the property. For example, an established professional who seeks a place for after-hours personal development will have to reflect on the worth of a purchase from the primary market, for he will not be able to enjoy the benefits of the property until about three years later when it will be completed. Meanwhile, he will have to service the property loan, which may constrain his spending on other comforts.

Buying a private home requires a huge amount of capital which can only be justified by the property's value proposition.

This is all the more so if financing the property will displace the buyer's enjoyment in other aspects of life or affect business cash flows.

A buyer can have more certainty if he proceeds with a clear mind and with the necessary preparation, particularly where there is now little recourse via reselling the property since harsh sellers' stamp duties will apply within the initial years of the purchase.

Ong Kah Seng is senior manager, research - Asia Pacific at Cushman & Wakefield.