Price Per Square Foot Versus Quantum: Which is More Important?

Everyone knows to look up the price per square foot; but is low price per square foot always a sign of good value? The truth is a little complicated:

What’s the difference between Price per Square Foot (PSF), and quantum?

The psf is exactly what it says – the rough amount you pay per square foot (it’s not exactly accurate, as not every single square foot is usable living space. Your air-con ledge, for instance). The quantum, on the other hand, is the total sale price of the property.

This recently became a topic of discussion due to the high demand for compact (shoebox) units, which are 509 square feet or below, and tend to have a high price psf. However, these same units tend to have a low quantum, which make them very affordable to starting investors. For example, Midtown Bay has units with a high price psf (over $3,000 psf), but quantums as low as $1.38 million – cheap for a condo in the Bugis area.

A common error is to assume that psf is a clear indicator of value. For example, say two homes both have a quantum of $1 million, but one is $2,400 psf, whereas the other is $2,450 psf. Some buyers may mistakenly assume that, in this case, the home with a lower psf is of “better value”. But that isn’t how it works.

Psf is a somewhat one-dimensional measure

Psf doesn’t take into account factors like location, the quality of finishing, and range of facilities. For example, a 30-year old condo unit, in an ulu region, may have a very low price per square foot – but in terms of quantum, it may be equally priced with a newer, smaller condo located in River Valley.

Between the two, the smaller unit will probably be easier to rent out at a higher price. Assuming the quantum is similar, this means the smaller unit – despite its higher psf – will have a higher rental yield. So as you can see, PSF on its own is not a very good indicator of value.

Another problem with psf is that, unless you’re comparing two properties with very similar layouts, and in the same location, it can become meaningless.

For example, consider neighbourhood A, where at the time of writing properties have an average psf of $1,782. Then consider neighbourhood B, with an average psf of $2,688. Which would you consider to be a more upmarket area?

Well, A in this case is Sentosa Cove, whereas B is the Rochor area.

If we look at quantum, however, Sentosa Cove properties average around $7.48 million, whereas Rochor area properties average $4.12 million.

So when IS psf a more important indicator?

As mentioned above, psf becomes more useful as the properties compared are more similar. For example, say you are comparing two more or less equal sized condo units, in the same block. Both are new from the developer. In this circumstance, psf can provide a very useful measure of value (though it still doesn’t take into account factors like facing or view).

Psf is also a useful measurement in certain types of commercial properties. For example, an owner of a retail or warehouse space might measure the price psf against the rental income generated psf (this can affect the intended tenant mix. A single supermarket might generate less rental income psf than, say, renting out the space to multiple smaller retail stores).

Third, price psf can be a useful metric when a high degree of construction is involved – such as if you’re tearing down a bungalow and building a brand new one on the land. But this is too complex to get into here, and most Singaporeans will probably never do this.

For most home buyers and even residential landlords, however, the quantum should be the main concern

The quantum is ultimately what impacts your rental yield, your ability to get financing, and your holding power. These are far more important factors to consider, than the price psf. Beyond that, factors like location, facing, and amenities all play a bigger role.

That doesn’t mean that price psf should be ignored. Rather, it should be one of many factors you take into account. Don’t read it in isolation, or give it priority over the factors mentioned above. You should also be sure to use it in context – don’t compare price psf between entirely different property types, such as landed properties and condo units, or between properties in very different locations (e.g. fringe neighbourhoods versus Districts 9, 10, and 11).

What do you think of price per square foot as a measure? Voice your thoughts in our comments section or on our Facebook community page.

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