http://www.todayonline.com/Business/...ts-true-demand
Too much advance buying distorts true demand
by Colin Tan
04:46 AM May 13, 2011
I have always advised potential new home owners or genuine upgraders that their main motivation to buy a property should be based on need and not greed.
Buying in advance slightly ahead or delaying a purchase for a short period of time is alright but not when it is too far from the period of need.
Buying ahead may mean getting married earlier than planned - when there are still issues to be resolved.
At the other end, in delaying a purchase, there may be opportunity costs that are not quantifiable, such as having children, privacy and shorter commuting times.
It was therefore quite worrying that, despite a significant ramping up of Build-To-Order (BTO) launches over the past several quarters to reach new highs in recent years, the demand for new HDB flats has remained as strong as ever.
We continue to read news reports of this or that BTO project being oversubscribed several times. We are told that a significant number are repeat applicants - households that have failed to secure a flat in earlier launches. However, what is disquieting is that there appears to be no discernible trend to show that the underlying subscription rate has come down in any significant way.
Even if the public housing authorities have seriously underestimated demand in previous years, it is inconceivable to think that all this new demand - at multiples of average demand five to six years ago - is simply pent-up demand.
Basic economic theory tells us that when prices go up, demand falls. Yet, in our current situation, more are buying as prices head upwards. The only explanation is that quite a significant proportion of this demand is advance buying - from households who do not anticipate that they need their flats in the short term but are applying to buy now before prices go even higher. The greater the panic, the higher the proportion of advance buying.
Some of us simply cannot understand the panic felt by young couples, especially since the Government has made it clear both by words and deeds that they will increase the number of BTOs if there is demand.
Take a hypothetical young couple who are not even remotely contemplating marriage. But because of advice from other couples and their peers, they apply to buy in advance, just to be on the safe side. They may not worry if their first two applications are rejected. But with the third rejection, they start to feel anxious.
And because they have been monitoring the market closely, they can see prices climbing with each new BTO. When they are rejected the third and fourth time, panic sets in.
Such "panicky" couples are a walking advertisement to all other couples to buy now rather than later. And so the proportion of advance buying snowballs with more of such couples. The news spreads fast among their friends and, as we know, bad news spreads even more quickly. Many young people have told me that even their parents are urging them to apply without delay.
Common sense tells us that we cannot have too high a proportion of advance buying because there will be severe market repercussions down the road, some of which can be pretty unpleasant.
Too much advance buying leaves too little demand in future years. Too much building at about the same time also stretches the capacity of the construction sector and leads to high demand for materials and resources, in turn leading to higher prices. After these units are completed and the minimum five-year occupation period reached, the pool of resale flats will balloon, leading to sharp falls in prices.
To arrest or quell this panic buying, the authorities should consider launching even more BTO projects, maybe twice or even triple the current number, at the same time.
Alternatively, if there are insufficient manpower resources to prepare for so many BTOs to be launched together, the authorities could impose a temporary price freeze - of maybe a year or two. This way, those who are not in urgent need can wait right up to the end of this grace period before applying. This would immediately calm and remove most of the advance buying in the market, leaving just the true current demand.
Like any inflation scourge, this bout of panic buying needs to be stopped quickly before it grows and spirals out of control.
Colin Tan is head, research and consultancy, at Chesterton Suntec International.
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Originally Posted by Regulators
He's now blaming these buyers for the market not going to what he "predicted".
