Monday, May 14, 2012

Singapore government raises a red flag on shoebox popularity

Shoebox units, usually small studio and one-bedroom condominium apartments, has been very popular in recent years. The developers who are trying to make money on land they purchase with ultra high price tags are pushing them and buyers who cannot afford even the normal (so-called) mass market private units even with ultra-low interest rates are snapping them up like there will not be any other buying chance. And slowly, shoebox apartment concept started in the city center is creeping into the Singapore heartlands. These less than 50 sq meter units are very popular among investors since their price is lower than normal units and can get good rental income beating the mortgage rate, well for now.

According to National Development Minister Khaw Boon Wan, there are 2,500 such apartments in the market now with 80 per cent of them in the central region of Singapore. But this number is expected to surge fourfold to 9,700 units in the next three years. But more worrying for the Singapore government is that many of the show box units in the pipeline are in the heartlands. In Singapore, the regions outside the city center are called heartlands because they are where Singaporeans actually live and are quite different than tourist and business oriented city center.

In the past few weeks, Khaw Boon Wan raised concern on these units several times which has fed an expectation that the government can introduce another cooling measure to target these units. But Mr. Khaw said that the shoebox units are untested in heartlands and "because it's an untested market, it is hard for me to intervene thinking that I know better than the developers and the buyers".

Unlike Singapore's city center, there are many HDB flats in the heartlands which are much bigger and affordable than shoebox private units. According to Mr. Khaw, most of the shoebox unit buyers are Singaporeans with HDB address.

According to SLP International Research Head Nicholas Mak, despite the cooling measures, Singaporeans are still looking for ways to invest in property - given the low interest rates. Low interest rates does not only make private properties affordable "for now", they also let money parked as cash to be eroded by very high inflation rates. Actually, shoebox apartment units are not problems, but they seem to be the symptom of problems caused by ultra low interest rates kept artificially there by big money printing machines of the central banks of the world.

The real danger with the shoebox units are the expectation of renting them out with the current rental rates for a long period of time. Singapore's current rental rates are unsustainable and when they crash as more and more flats enter the market, they may go down. Another problem is also a possible oversupply of these units. In the heartlands there are few reasons to rent a very small private flat for around 3,000 SGD per month while it is quite easy to find a very large HDB flat much below that price.

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