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Is work-from-home phenomenon creating a disconnect from reality for property buyers?
WAS a surge in private home sales in the last two weeks of June purely an expression of pent-up demand, following the second phase of Singapore's reopening after the circuit- breaker partial lockdown?
Or could it also reflect some property buyers' disconnect from the reality of an economic recession and job losses?
The answer could have potential implications for some property developers.
First, let's take a quick look at the private home sales numbers.
JLL's analysis of URA Realis data as of early last week shows that of the 2,606 total private homes (excluding executive condo units) sold in the second quarter of this year in both primary and secondary markets, slightly over a quarter or 25.9 per cent were transacted from June 19 (the start of the second-phase reopening) to June 30.
Looking at only new sales by developers, the share was even higher, with units sold during June 19-30 making up 31.8 per cent of the 1,690 units transacted in the whole of Q2 2020.
From June 19, developers could reopen showflats; property viewings were also allowed again. These activities had been suspended for nearly two and a half months following the start of the circuit breaker on April 7, as part of measures to contain the transmission of Covid-19.
This surge in demand after the Phase 2 reopening is widely credited in industry circles for the reversal in the benchmark URA private home price index from a decline of 1.1 per cent quarter-on-quarter (q-o-q) for the Q2 2020 flash estimate - based on transaction prices up to mid-June - to an increase of 0.3 per cent for the final index reading (which took into account transactions for the full quarter, including the second half of June).
Enthusing about the 0.3 per cent q-o-q rise in URA's price index for Q2, coming after a 1.0 per cent decrease in the previous quarter, some property agents have waxed lyrical about the resilience of the Singapore private housing market.
Some of the surge in home buying after the Phase 2 reopening would be genuine pent-up demand after more than two months of not being able to visit showflats, which most potential buyers would still want to do before committing to a property purchase.
But some of the exponential increase in private home buying for the June 19-30 period may also reflect excessive optimism.
According to one school of thought, this excessive exuberance could have its origins in the work- from-home (WFH) phenomenon that has taken root during this pandemic.
Unless one is involved with the frontline operations or revenue generation of an organisation, most employees cooped up at home may end up living in silos, with very little feel or understanding of how the company is faring. Without in-person interactions, they may not be able to pick up body language, subtle cues and other nuances from their bosses and colleagues.
Some of those who embarked on "revenge buying" of private homes once showflats were reopened may have committed to a property purchase without feelers on the security of their jobs. Moreover, the Jobs Support Scheme (JSS) has been cushioning most folks against job losses or wage cuts in the past several months.
That's not all there is to WFH. With less policing of employees, it is tempting for some of them to make surreptitious detours to Webinars on property buying - during official work hours. Agents are getting more marketing time from potential buyers these days. Listening to charismatic key personnel of property agencies talking about growth stories for various parts of Singapore and highlighting prospects for property price appreciation can create a fear-of-missing-out mindset among potential buyers. Thus, buyers may be brainwashed into buying a property.
Never mind if a buyer is financially tight at the moment. Agents are ever ready to hook them with the offer of entering into an arrangement where a developer repeatedly re-issues the option to purchase (OTP) upon expiry, without any forfeiture of booking fees. This can last for up to a year or in some cases up to 18 months from the date of the first OTP, and give the buyer time, for instance, to sell his existing home.
This sales tactic may appeal to, among others, potential buyers who are servicing a mortgage on, say, a HDB flat and who would be hit with a tight loan-to-value limit if they were to buy a second property. Or they would breach the total debt servicing ratio (TDSR). Furthermore, Singaporeans pay 12 per cent additional buyer's stamp duty (ABSD) when buying their second residential property.
Feeding the buying frenzy
Property insiders told The Business Times that sales entered into under a re-issue of option arrangement, along with other factors, have helped to feed the buying frenzy that began on June 19.
And there's no need for developers to drop headline prices to attract buyers (in fact they could even marginally raise prices) if they engage the services of property agents who are willing to funnel a chunk of the commissions received from developers, to buyers. This is sometimes done under the guise of "referral fees" and the kickback is made to buyers indirectly, through a friend or family member of the buyer, to avoid detection, as such payments are in breach of Council for Estate Agencies guidelines.
These days, some savvy property investors are looking for agents who will give them a higher chunk of their commissions.
Commissions are captured under a developer's cost of sales; they do not affect the headline price that the developer reports to the authorities. In short, prices are inflated.
This lends credence to the property price growth story that agents have been effusing about during Webinars. The 0.3 per cent rise in the benchmark private home price index in Q2, despite Singapore being in the throes of recession, is music to the ears of agents.
So what happens next?
Once the JSS and other forms of support by the authorities taper off, reality will start to sink in.
It is important to note that a buyer who enters into a property purchase with a developer premised on continual re-issuing of the OTP may not have secured a bank loan; he may not qualify for one if he is already servicing an existing mortgage.
Therein lies the potential danger to a developer with a substantial number of units sold through continual re-issuing of OTPs.
Such sales are not guaranteed. Twelve to 18 months later, as the day of reckoning draws closer, what if the buyer suffers a deterioration in his employment situation and, coupled with banks tightening mortgage approval process, fails to secure the necessary funding to proceed with exercising the option?
The buyer can cut his losses by forfeiting a quarter of the 5 per cent booking fee, that is, 1.25 per cent of the purchase price and walk away.
If a substantial number of units are returned in this fashion in a particular project, its developer - who might have been reporting the project as being, say, 70 per cent sold - may see this figure plunge significantly.
This might trigger a breach of loan covenants stipulated by its lender requiring that a certain percentage of sales in the development has to be met by certain milestone dates.
Banks might want to keep a closer watch on developers' sales process by tracking the percentage of units in a project where options are continually re-issued without any forfeiture of booking fees.
Industry insiders flag that of particular concern may be construction groups with property development arms.
Such organisations may already be facing tight cash flow in their construction business, and their financial problems may be compounded if substantial numbers of buyers in their residential developments drop out.
There may a price to be paid later for talking up the property market now.