Tuesday, June 24, 2008

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Impact of Increase building costs on property prices

The fact is: Building costs have gone up 20-30% from a year ago.

With soaring building material and labour costs, one would naturally expect property price to rise. At first sight, the "Increase building costs=Increase property price" argument seems almost commonsensical.

A forumer was quick to rebuke such argument, "You got it wrong. Selling prices are not determined by construction cost. They are determined by market forces. The developer will sell at the maximum that buyers can afford and are willing to pay, which has been considerably more than building cost. But buyers have already hit the limit of affordability and good sense, there's no point raising prices when there's no one rich or foolish enough to buy. "

Indeed, the "Increase building costs=Increase property price" argument is looking at the supply-side of the property market.

The property market, like all other markets, all made up of supply and demand.

If you look at inflation from the demand side, you'd see that affordability for property, especially for private property, has declined; and market sentiment has declined too. This basically reduces the volume of demand for private property as evident from the dwindling sales for the last 2 quarters.

A very crucial factor that works in favour of the demand-side is the Singapore government's commitment to home-ownership through providing affordable HDB housing.

HDB pricing policy limits the impact of rising construction costs as reported in the Business Times below:

HDB pricing policy limits impact of rising costs
CONSTRUCTION costs for Housing & Development Board (HDB) flats have increased but the impact on buyers is likely to be limited, due to HDB's pricing policy and cost-control measures. Speaking to the media at HDB yesterday, National Development Minister Mah Bow Tan said that 'construction costs have gone up significantly both for the building of private as well as public housing'. According to him, construction costs may have risen 20 to 30 per cent in general.
The Business Times on Jun 11, 2008

In a forum reply last year, HDB stated that the prices of new HDB flats are based on the market prices of resale HDB flats, not on construction costs. On top of the affordable HDB pricing principle, the government also provides various subsidies for first-time HDB buyers making it all the more attractive for first-time buyers to have a HDB as their entry property.

As such, while market forces may work towards "Increase building costs=Increase property price", this is likely to be cushioned by the HDB pricing policy. However, one would still expect new HDB price to trend upwards from its current level, while price correction is expected for the private property.

May also want to read:
HDB as Entry-Property: Prudent Property Investment Strategy
HDB-Private Properties: Prices Trend in Opposite Direction
History of Singapore Property 1960 to 2008
Property Price Index Graph Plotter & Online Property Valuation


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The blogger here has been affectionately named by close allies as "Smart Buyer" but really, he's not smart. Smart Buyer just believes that being prudent is smart. That's the essence of the message of this blog and Smart Buyer hopes it'll benefit other property buyers.

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