Tuesday, September 1, 2009

Counter-intuitive and property investment

An intuitive proposition is one that seems to be true when assessed using intuition of gut feelings.

A counter-intuitive proposition is one that does not seem likely to be true when assessed using intuition or gut feelings.

For example, before we proved that the world is round, many folks believed that it is “common sense” to assume it is flat, or at least, not round! It takes great wisdom for another person to question the assumed belief or “common sense” and often takes great rigour to uncover the truth. I mean, who would actually observe the Earth’s circular shadow during a lunar eclipse?

In real life, many decisions were made based on intuition or “common sense”. However, many people are time and again proved wrong. Hence, humans are never rational. Their intuitions are often imagination of sorts, rather than based on actual facts and figures.

Objective truths are often discovered the hard way, either through scientific research or personal horrific experiences. Many scientific ideas that are generally accepted by people today were formerly considered to be contrary to intuition and common sense. For instance, 0.9999… is equal to 1 is considered counter intuitive. People used to believe 0.9999…. is smaller than one.

There are definitely more examples if you search the web. I shall not list them all.

In investment, many risks are assumed to be absent and thus brought the downfall of many. One have to be counter intuitive to be able to see the hidden risks.

For instance in the purchase of a property at current times, the buyer assumes that a new property (e.g., Trivista, Vista Residences, Optima) will fetch a higher price upon TOP and property in Singapore will only head north. This is the kind of intuitive and “common sense” idea that is deeply entrenched in many buyers mindset.

Buyers continue to believe that their jobs are stable (hence a 30 year loan commitment), Singapore will remain a paradise for rich foreigners (hence the perpetual rise of home prices), neighbouring countries will remain laidback (forgetting Hong Kong, Korea, Japan, Taiwan as competitors and assuming Malaysia will remain as it is), he/she will not be diagnosed with cancer and be forced to sell his property prematurely (many Singaporeans are under insured), interest rates will be low (until they sell/flip their property), buying a house during recession is a sure winning bet and tomorrow will only be better.

That said, does that mean we should not buy property for investment? Of course not! But I will be mindful of the risks before that. For instance, before I embarked on a masters course, I went for a full body check up to ensure that I have no illness. I do not want to give up my studies and forfeit my tuition fees because I assumed that cancer will not hit a 30 year old young man. I will definitely insure myself against early stage of cancer and purchase a higher quantum of disability income if I were to commit to buy a private property. The insured sum should at least be $500,000 and disability income benefit of at least $3,000 monthly. Based on earlier statistics I am quite sure most people are not well insured to that extend.

I will also not overstretch my repayment but rather keep payment within 15 years and monthly payment of maximum 40% of my gross pay, before monthly rental contribution. This would reduce the odds of over paying my property through exorbitant interest rates and having a higher level of free cash flow at my more vulnerable years.

That is why I have been rather frustrated of the kind of frenzy that has over taken the property market. I mean, a 2 room 99 year property selling for almost 1 million dollars, everywhere?! The couple who bought it cannot have more than 1 child! And they are going to spend the rest of their lives repaying the loan. Assuming a hefty $200k down payment and a 30 year loan at 3% interest rate, at the end of 30 years, they would have paid $2,615,000. Their monthly payment is $3,372.80. Assuming they earn $10,000 monthly, that is almost 34% of their gross income.

How many couples earn that amount? And you are assuming you can sell a 2 room apartment, left with 66 years lease (assume 3 years construction period) for more than $2.6 million?

Not to consider that one may be retrenched, parents and themselves may fall ill and need medical expenses, they may have more than one child and interest rates may rise etc.

If you are thinking, based on intuition, buying a property here is a sure bet!

Then perhaps, maybe then the Earth is flat.

PS: Finally sorted out the orientation!


Marvin said...

Why the frustration? Good property is a scarce resource and can be expected to appreciate in value.

Like I mentioned in an earlier post. I bought in June 2009 and don't see the valuation plummeting in 2010/2011 to lower than 1H09 levels.

Looking at the recent caveats lodged, there is an across the board rise in property prices.

Musicwhiz said...

Hi SG Blue Chips,

Think the points you made are very valid. I am also very wary of the sudden spike in property prices, and think this is the work of a manipulated market. It's best not to over-stretch (as you say) and remain prudent.

I just read some news today that USA may have to raise interest rates very quickly in future to combat any inflation which results from their massive fiscal stimulus. So you can imagine how this will affect interest rates in Singapore - people will be caught off-guard by the sudden increases and their loan installments will jump. What may seem "affordable" now will soon cease to be.....


JKfund said...

Oh, Marvin, you bought in June 2009? I bet you can get much cheaper in year 2006. heee...

But, to add on, to buy a condo for investment, we usually breakeven with monthly rental. Of course, you would say, what if after 12 months tenure, and you take 3 months to find another one.. that's why good location is important...

As for now, I would give condo purchase a miss from the time being, and pour money into equity market, strange thing, this uptrend wave of property price is actually in line with stock market, instead of lagging 6 months behind as the past history has shown (2 cycles)...

Sgbluechip said...

Hi Marvin, as I do not know the loan, financial situation, investment horizon, family needs and other important factors, I cannot really comment if buying a property in June was a good investment.

Definitely, property is in bull market mode now. But we know that people also lose money when they invest in bull market. Again, it is subjected to individual circumstances.

Unless profit is realised, paper gains are still transitory.

Just my 2 cents

Sgbluechip said...

Hi MW, thank you for always following my blog. Many thanks for placing my blog link on your blog too!

Interest rates move in cycles, together with inflation and monetary polices they shape the spending and saving habits of the family next door. Of course, people looking at current rates to predict the future to their own advantage are a slight tad taking a high risk.

Whether there is high returns remain yet to be seen.

Marvin said...

To reply to JKfund, aren't you a bit late to the party if you want to "POUR" in money into the stock market now?

I bought, or "poured" money into the stock market when it was between 1500-1800. Since the market has gone up by 50%+, I am not holding my breath for it to go up by another 50%. Might as well take some money out and move into property where prices lagged the stock market recovery.

Similarly, I am not holding my breath and waiting for the property market to crash before buying.

Ultimately, it's a question of whether to keep your 50% stock market gains in the stock market (I presume most of you here, being sophisticate investors and readers of blogs such as this, poured money into the stock market when STI went below 2000), hoping that the stock market will go up some more, or moving the money somewhere else.

(As Musicwhiz has pointed out, inflation is returning, so cash/bonds is not a good option).

gerimegaly said...

Hi SG Blue Chips,

there are those, who will just "do it", without sparing a thought of the "minor details". But unfortunately, it is always the "minor details" that get/hurt you.

In Singapore, property/real estate is a really "Big" ticket item, and slogging one third of one's adult life, just to pay off one's home loan just doesn't make sense. I believe there is much more to life, then ensuring your mortgage payments are paid on time, every single month.

But then again, to each his own...