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!