Published March 24, 2011

Tight fit as homebuyers think small

More picking up smaller units at lower overall costs as tighter loan-to-value ratios pinch investors; psf price of shoebox units rises


(SINGAPORE) The last two sets of government measures to cool the property market may have pushed more homebuyers to opt for smaller and cheaper private homes, new research shows.

Analysts attributed the trend to the tighter loan-to-value (LTV) ratio for buyers with existing mortgages. The LTV ratio was slashed from 80 per cent to 70 per cent in August 2010 and then again to 60 per cent in January this year. This means that the buyers have to fork out more cash upfront.

An analysis of some 14,000 caveats lodged for private homes sold by developers from January 2010 to February 2011 found that a greater proportion of homebuyers chose smaller units - under 861 sq ft - after each round of the last two sets of government measures.

And more and more homeowners also opted for units that cost less than $800,000, according to the analysis done by property firm International Property Advisor (IPA).

From Jan 1 to Aug 30 last year, some 30 per cent of homebuyers opted for small format units smaller than 861 sq ft. The proportion rose to 42 per cent after new anti-speculation measures were announced on Aug 30, 2010, and climbed further to 46 per cent after a fresh set of cooling measures were unveiled on Jan 13, 2011.

Similarly, the proportion of homebuyers who chose units priced under $800,000 rose from 22 per cent to 28 per cent to 30 per cent over the three time periods tracked. Most entry-level private homes are priced at under $800,000.

Each round of cooling measures has clearly driven more investors to purchase smaller sized, lower budget units and located in the outskirts, noted IPA chief executive Ku Swee Yong.

'Today, investors are forced to think smaller due to the higher cash downpayment required and the lower 60 per cent LTV ratio for mortgages,' he said.

'The impact of the upfront cash requirement and the reduced borrowing limit has herded more investors towards smaller units and towards projects in the outskirts of Singapore.'

According to official data, 67 per cent of all private homes sold by developers in February 2011 were located in the outside central region, which is a proxy for cheaper suburban mass market locations. This is the highest level since April 2008 - the previous peak of the market when speculators steered away from luxury products in search of more affordable investments.

But the growing demand for smaller units has created one unwanted problem: prices in this segment of the market are rising.

According to data compiled by CB Richard Ellis, the average price of units smaller than 861 sq ft stood at $1,420 per square foot (psf) between Feb 20 and Aug 30 last year, which was the time between the announcements of two rounds of measures to cool the market.

This rose to $1,441 for the period between Aug 31, 2010 and Jan 13, 2011; and $1,559 for the period between Jan 14, 2011 and Feb 28, 2011.

Analysts have blamed shoebox units, which can have psf prices of up to 20 per cent more than other homes in the vicinity, for distorting the official Urban Redevelopment Authority's private property price index.

'The small units are the ones that are setting the record high psf prices,' said a market veteran.

Looking ahead, developers are set to roll out projects with a higher proportion of smaller units to maintain selling prices that are below $800,000 for the most part.

At EL Development's Skysuites 17 off Balestier Road - which will be launched next week - 84 out of the 105 units in total are one-bedroom and two-bedroom units between 355 sq ft and 678 sq ft in size. The company's managing director Lim Yew Soon said that demand for shoebox units is growing.

'When it comes to the fringe of town, smaller units are usually taken up well due to their affordability,' he said.

Oxley Holdings chief executive Ching Chiat Kwong said that demand for shoebox units, which his firm specialises in, have picked up over the last year in part due to government measures.

But the measures, which include a seller's stamp duty of up to 16 per cent for private homes, have created 'genuine' demand for smaller units, he said.

'Because of the recent government measures, speculation has almost stopped,' Mr Ching said. 'People - singles and newly-married owner-occupiers as well as investors - are buying with the intent of holding onto their units.'

Oxley will continue to build projects with mainly small format and shoebox units, he added.