Rent or Buy House In Singapore?

As I reach MOP for my house, I face 2 choices: To cash out and rent or to buy (another one). Conventional wisdom (or culture) states that we should always buy, otherwise we are subsidising the landlord. This mindset is especially prevalent in Singapore where house ownership is more than 90%; public housing is highly subsidised and housing instalments are paid for via CPF.

Due to the CPF restrictions, many people feel that they are not paying for housing as it is paid for via CPF contributions. This reasoning is flawed as CPF can be cashed out at age 55 and pays a respectable 2.5% risk free rate. If we were to ignore mental accounting and view CPF as really our own money, the tendency of owning a home may differ substantially.

Let's breakdown the cost of my home ownership and determine if it makes sense to rent or buy.

Owning a home (calculations exclude utilities)

20% Downpayment for a 1.2M private property: SGD 240k (add 10k for basic renovation to round up to 250k)

Yearly interest payable base on 2% (long term rate) approximately = 960k x 2% = SGD 19,200. I am assuming interest rates rising gradually but the principal is reduced hence yearly interest paid works out to be 19,200. It is hard to forecast the total interest paid but let's just simplfy it to SGD 19k.

Yearly maintainence: SGD 4000

Property tax: $400

Spending on servicing of aircon, repair/change appliances - $600

Hence per annum, the cost of maintaining a 1.2M home for own stay is $24,000.

I am not factoring monthly instalments (of $3500) as the principal paid is your own money and can be recouped upon sale of property.

They key deciding factor is whether you can generate enough returns on the SGD 250k downpayment such that renting makes more sense to buying.

Assuming a 5 year investment horizon (on non leverage basis), a 250k investment if lucky enough, can generate a 5% return or 12,500 per annum return. If we were to be risk adverse and purchase the 4.35% Astrea 4 bond, assuming a buy price of 102, redemption of 100 at year 5, total return is 49375 or 3.95% (assuming interest accumulated reinvests at 0%).

The base case scenario will be to park the funds idle in CPF at 2.5% and thus earning $6250 interest per year.

Looking at the calculations, the cost of owning a 1.2M home works out to be

Opportunity costs (6,250 to 12,500)+ Interest 19,000 + Tax, servicing, maintenance 5,000 = $30,250 to $36,500

Renting the same house works out to be $2,500 - $3,000 per month assuming it is either a 2BR in suburbs or 3BR in further flung places.

How do we make a property purchase decision if we are indifferent to buy or rent? I think a key differentiator will be a person's investment ability.

For a person who can generate 10% P.A on 250k, it is intuitive selection for him to rent and invest the rest. However, not many people I know (myself included) can invest at that rate (especially when equities markets are at record highs).

The selection is much easier (no brainer actually) when the person is deciding whether to purchase or rent a HDB. HDB is highly subsidised (and conditional, not everyone can buy) and cost probably just 2.5k/month to rent a 4 room flat (in central areas). The interest cost is halved and home ownership expenses works out only to be less than 20k including opportunity costs. (Renovation costs more for HDB flat though).

(I am not factoring utilities or other expenses which need to be paid if one were to rent as well)

Furthermore, buying a home provide you with an option (up to lease expiry) to hedge against housing/rental inflation as long as you continue servicing your mortgage. It comes with a piece of mind that you own the place and not be at the mercy of landlords when markets are rising. However, it places a unnoticed strain on retirement income due to constant depletion of CPF savings.

So how? Rent or buy?

For people who choose to stay in HDB, buying makes perfect financial sense.

For people who are at the cross roads between renting and buying private property, take note that renting is akin to shorting the property market - you borrow a house, pays interest (rental on it) while waiting for housing markets to come down. If it comes down, you can buy for instance at 10% discount from current levels thus profiting $120k savings (10% of 1.2M). The rental you have paid eg 5 years x 30k = 150k; Add on the 250k returns of 3.95% = 49,375, the difference is SGD 19,375. Not too bad since the future savings on the original 1.2M property is compounded over the long term (on purchase).

It is not an easy decision to buy or rent, long or short. If we are in the middle of a financial crisis, it is an easy decision to rent (a year) first, buy later. Since rental is low and home prices will continue to fall. However at current juncture where there are no foreseeable crisis on the horizon, shorting the housing market may not yield positive return over next 5 years. There is always the risk that investment on the initial 250k goes sour or markets run flat or higher for another 10 years. Then one would have to continue renting for even long period to ride out the market.

In summary:

Buy HDB is always better than renting if you can

Rent private housing only if you can invest and earn at least 4%-5% P.A on your downpayment + reno budget

Buy private housing if market is trending upwards and be prepared to rent at least 5 years if one is timing entry into the property market. This is to provide the runway to allow cash investments to reap their intended returns while waiting for housing markets to show signs of bottoming.

That said, refer to my blog post in 2013 on HDBs. I think I am fairly accurate here. https://sgbluechip.blogspot.com/2013/01/hdb-prices-will-come-down-because-1.html

3 Bedroom or 3 Bedroom Dual Key

The dual key unit costs $975,000, which is about $250,000 more than the unit I bought. I was struggling whether to spend that $250,000 for the unit for investment. However I decided against it, not due to affordability issue, but rather value principles.

The dual key unit costs $250k more compared to 3BR, $300,000 more than a 2BR. Hence buyers are paying more than 1,000 psf for the 250 square feet studio. This costs the same as buying private condominium studios.

If Topiary appreciates, likely because of good rental demand, then dual keys unit makes perfect sense. But we won't know till 3 years later. Another alternative is to buy 3BR, if rental is good, the 3BR will appreciate to possibly about 1M. By then I can gear up back to 80%, get the additional cash out to buy another studio for rental investment. Meanwhile I can save the down payment, stamp duties, interest costs for shares investments.

Hypothetically, for my case, I bought at ~700k, loan ~560k. If valuation goes up to 1M, I will gear up back to 80%, which is 800k, less outstanding loan about 500k then and CPF used which is 15% or 105k + accrued interest + instalments to date using CPF. I still may have about 200k cash left over for a down payment for a full sized studio.

If rental is lousy, it means in the first place the dual key unit was a poor bet.

Dual key makes sense only when the property is completed and rental income is evident, especially if its near mrt. For my case, it may be a tad risky after some consideration. Who is the target segment of tenants? Professionals earning $5,000 a month? Are they willing to cramp in a hotel sized property? If rental is at most $1,500 monthly, it will take about 14 years to break even, the $250,000 studio unit. If I were to compare it to a 2 BR, the breakeven period will be even longer at 17 years. This is because the composition of the dual key unit is a 2 Bedroom + 1 Studio. Hence I will be staying in the 2 BR unit and renting out the studio. I have not even taken account into agent fees, utility bills of tenants (since I am effectively renting a room out), property taxes, wear and tear repair etc.

Topiary 3BR single key is a safer bet at the price buyers are paying and also ensures a more comfortable monthly repayment schedule. It is the Chinese saying of being defensive if you take a step back but allows you to be offensive if market is in your favour.

Of course my quality of life, from a space perspective will be better since my living space is bigger with single key 3BR than a dual key unit!

Finally bought a property! (Part 3)

Then, we chanced upon Topiary, which looked very far off on the Singapore Map near Sengkang, along Fernvale and Yio Chu Kang Road.

It is not within 5 minutes to walk to Fernvale LRT. It is a good 15 minutes. We walked over to Greenwich, which has a cold storage and a number of nice restaurants. The nearest MRT was Buangkok 3km away, followed by Yio Chu Kang, a 10 minutes drive away.

Clearly, the location was not the best. However, we noticed that new condo developments just across the road were selling for at least $1100 PSF. Even older developments can be rent out at about $3,000 for 1000 square feet condominium. There were not many condominiums in that area, being a new estate, but at seletar area, there are many landed properties, similar to Kembangan, Siglap area.  The area gives me a nostalgic feel, with Holland Village as a similar feel (before MRT was up then). I am likely to drive and continue to drive hence dropping off my wife then at MRT station in the morning will alleviate her transport woes.

The pricing was reasonable. On average, they are selling for $730 PSF. The unit I am eyeing for, a 21^st level pool facing 3 Bedroom unit is selling for $716,000 for 915 square feet. This works out to be $783 PSF before grant. As our income is at $12,000, we are eligible for deferred $10,000 grant when my fiancée becomes citizen. This will further reduce our cost to $772 PSF.

Assuming ECs will trade at a 15% discount to nearby similar age properties, there is at least a $100 PSF upside for Topiary. This allows me to floor my downside risk of purchasing market at current levels. Assuming I am able to rent out my condo after 5 years at $2800/month, my gross yield will be 4.76% after grant, before interest costs.

My cash portfolio of stocks generates at least $20,000 per annum of dividends returns, which can comfortably cover the monthly installment of the purchase.

This allows me to continue my cash investments and not be afraid of losing my job. At most I become a tuition teacher, taxi driver or full time blogger; I will not lose the condo over my head. Both my wife and I can work in a $2,500 job and still afford the monthly installments without touching our retirement nest egg.

My CPF investments can continue as well as I am only utilizing $60,000 from my OA account for the down payment and stamp duty, the rest shared with my partner.

The calculations are as follows:

5% cash = $35,800

15% CPF = $107,400

3% Stamp Duty - $5400 = $16,000

Total = $159,200

Loan = $573,000

Monthly installment base on 2.5% = $2,270.

Risks:

We are actually buying at the peak of the property cycle. I must be prepared for a 20% downside for my property. Hence, I am likely to liquidate my property counters to avoid taking double layered risks.

My partner and I have about 3 years more before we move in. We need to ensure that we can wait till then and not break up before marriage or we will lose 20% of the property price.

There are at least 2 more sites reserved for ECs, thus limiting upside for Topiary. I do hope that developers bid higher prices for the land so as to translate to higher selling prices.

The next post will be on why we chose a 3 Bedroom instead of a 3 Bedroom dual key and forgo the potential for rental when Topiary is just minutes away from the Seletar Aerospace hub.

Finally bought a property! (Part 2)

Upon deciding to purchase Riversail, I brought my family members, fiancée, colleagues to view my chosen unit. They all feel it is a good buy, given current market situation. My fiancée who started work 6 years ago also said she could contribute some money for our future (be it for own stay or investment). All the better, then I will include her in the mortgagor as well. We did our sums and financing was extremely comfortable; she has about $70,000 CPF and $20,000 cash to contribute, I can cover the rest plus monthly installments till property is completed and ready to move in. It will be a tenancy in common 40%-60% arrangement.

We place a cheque with the agent and chose the highest floor unit.

However, if it is not meant to be yours, it will not be.

One morning I woke up and went to the IRAS website. I realized that because my fiancée is a PR, we are subjected to pay ABSD of 5%, even though I am a Singaporean. This pissed me off big time. I spent 2.5 years in NS and just because I am not married and want to get an unsubsidized private property, I have to pay 5% additional stamp duty? If we factor the usual 3%, we have to cough out almost $57,000 as taxes to the government! This is an excess of $39,000 in cash to the government. We were quite upset as this is no way to treat a SIngapore citizen, who refused to buy subsidise housing meant for more needy Singaporeans but will be treated as a PR instead. It is not about whether we can afford the condo unit, but rather whether we are willing to pay the tax that is a deadweight loss to us and society. It creates no value to anyone except the government.

We decide to retrieve back our cheque and look elsewhere for better valued properties.

We rationalised that since government wants to tax us, we will go the conventional way to enjoy subsidies on housing by leveraging my Singaporean identity and pink IC.

We were not keen at BTO, since the locations are poor and construction takes forever to complete. 2017 for the earliest in non mature estate. I will be a old man by then.

We went to look at the Design Build Sell Scheme at Parkland Residences, which was marketing almost $700,000 for a 2^nd level 5 room flat. We decided that DBSS stands for Don’t Be So Silly (DBSS). It is simply not worth the premium when your competitors are just BTOs and by paying a little more, you will be able to get a similar location but smaller sized Executive Condominium (EC).

We went to look at Heron Bay, which left only west sun facing units and low levels dual key 3 bedroom units. The finishing was decent, but the leftover units did not excite us enough to even stay more than 10 minutes at the showflat.

We went over to 1 Canberra. The showflat was already there for about 1 year. Most of the units are west sun facing. If you choose units that are not facing the west, your balcony view will be blocked partially by the unit that covers your west sun. The layout of the condo development was extremely packed, possibly constrained by the small and trapezium shaped land.

Prices are not cheap, selling for 750 PSF with eight courtyards beside selling for 810 PSF. It does not seem to be of value and capital appreciation will be capped by the full condo beside 1 Canberra. The nearest eatery is koufu a good 10 minutes walk away.  There was some defects in the showroom, which we were appalled, given that even a showroom can have defects, we have little confidence in the actual delivery of the unit. The developer is from China, which has little track record in Singapore.

We decided to focus on looking for EC, given the subsidies by government and cheaper PSF would allow us to purchase a unit comfortable and not rush into marriage till 2-3 years later.

The next post will talk about our purchase of EC.

Finally bought a property! (Part 1)

The next few posts will document my journey to search for a value property and the thinking process, dilemma I had during the hunt.

The first property showroom I went was Riversail near upper Serangoon Cresent. It was a private condominium developed by Allgreen. The property was about 3KM from where I am staying. I like the property for several reasons.

- Near to my current home. I am familiar with surroundings such as Hougang Mall, Buangkok, Compass point, Nex, Kovan heartland mall.

- Next to park connector that allows cycling to punggol and kallang.

- Efficient internal layout, with very little wastage space.

- Separate living and dining area instead of having to split your living room to dining and living into half.

- Decent pricing of $850 PSF. A 2+ study 915 square feet unit will cost on average $778k. Assuming a modest rental of $2,800 a month, gross yield is 4.3%.Even if rental is $2,500 monthly, gross yield is 3.86% P.A.

- Downpayment of 5% cash will cost only $39,000, the rest 15% of $117k can be paid by CPF since I am a first timer. It is extremely affordable. Monthly installments will be about $2,150 @1.5% interest; $2,460 @ 2.5% interest and $2,800 @ 3.5% interest.

- The furnishings are excellent for a mass market condominium. It comes with marble flooring, marble wall (hotel standard) in the master bedroom toilet, build-in fridge, shoe rack (outside your unit), branded kitchen appliances.

- Choice units are available and not released yet. I can place a blank cheque and be almost assured to secure my high floor 2+study pool view unit.

- Free 2 years shutter bus service to Hougang MRT was available upon TOP, which looks attractive to my fiancée who doesn’t drive.

- Nearby Executive Condominiums (EC) like Heron Bay are selling on average $750 PSF. Just by paying about $100 PSF higher, or about 100k more, I will not be subjected to HDB complex binding rules and regulations. Even completed ECs (park green) are selling for $800 PSF when it is already 10 years old.

Cons of the project

- Too many units of 900+

- Many condominiums under construction, Austville was sold at about $700 PSF, boathouse residences at $900 PSF, Heron Bay at $750 PSF, BTOs and DBSS projects can be seen under construction. It will definitely affect the traffic, rental yield, living quality, resale value of Riversail, in time to come.

However, the main purpose of purchasing a property is to ensure I have a roof over my head when my parents pass on and the current HDB is dividend among my 2 siblings. Hence, my consideration is for own stay rather than investment. Even if I were to sell off 1-2 years upon TOP, it will be of good value given that boathouse residences are selling for above $900 PSF, the ECs and HDB projects cannot be sold until 5 years after TOP.

 

Despite benefits outweighing the cons, I did not purchase Riversail and purchased another one 3.5KM away.

 It will be explained in the next post.  

A Visit To #1 Loft at Geylang

Few days ago I passed by a condo showroom about 400M away from Mountbatten MRT. I was curious about the climate of sales in new launches and decided to pop in. 

As usual, the actual location of the development was not at the showflat but about 1km away at Geylang Lorong 24.



Nice bed that matches with decor

There were only 2 prospective buyers in that afternoon (including me) in the showroom. The agent was very warm, telling me it is a 5 minute walk to Mountbatten MRT and Aljuned MRT stations. He added Geylang Lorong 24 is left with 1-2 brothels which will be “phased out” when the rest of the apartments (at least another 3 boutique residential developments) are completed.

Decent bathroom

The showflat was tastefully done up, the selling points of this development are as follows:

The loft does allow privacy between 2 levels

- Cheap financing. The list price of a 1 bedroom unit is about 780k, or about $1392 PSF (560 sq ft build up area). Buyers need to pay 5% cash, 5% CPF. The developer will pay for you 78k upon completion and you can take up a 80% loan from UOB or Singapura Finance. This means I only need to pay $39k cash and $39k CPF, developer will pay remaining 78k cash for me!!! Effectively, I am obtaining a 90% loan! Innovative!

Staircase up the Master Bedroom

- Ability to convert 1 bedroom to 2 separate bedrooms. The showroom displayed a typical 1 bedroom layout. The master bedroom is on the 2^nd floor with balcony, the living room comes with additional bathroom. The living room can be converted to a bedroom after adding a door, with a common kitchen with washer cum dryer. You can rent out to 2 singles!

- High investment yield. Assuming you rent out each “room” to 2 singles with near service apartment facilities, you probably can rent to them at $1600-$1700 each. After deducting utilities, maintenance, housekeeping, broadband, taxes and agent fees, you could possibly receive about $2,600 monthly.

Factor interest costs of 1.5% of loan ($624k) = $9360 per year

Return on initial investment= (2.6k x 12 months)-$9360 / ($72k + $18k Stamp duty + $3k Legal fees) = 23.5% per annum

Given the attractive investment yield, I decided to pay a site visit to Geylang Lorong 24. Some observations:

- There were at least 3 operational brothels. One of them was in between enbloc terrace houses. Hence, there is a likelihood your condo has a brothel beside it.

-  There were MANY PRCs men sitting on the pavement.

- There were at least 2 budget hotels in a side road at the end.

- The road along Geylang 24 is narrow, not suitable for drivers as you are likely to be stuck outside your house, inside your car when all the other developments are completed.

- #1 loft is definitely not suitable for families with children, but rather for individuals/ couples and prostitutes operating their own online vice.

- Aljuned MRT is a good 10 minute walk away, Mountbatten MRT is much further as you have to cross an overhead bridge, cut through pine close HDB, about 15 minutes walk away. This is accurate for my leisure walking speed.

I am impressed by the low capital outlay and financial innovation of the developer. The agent claimed that this project is by SC Global, but I couldn’t find any links between SC Global and #1 Loft. In fact, I have never heard of this developer.

The high yield comes with high risks. Interest rates may go up. Once it hits 3.5% and if you can only rent out at $2,000 a month, you will be running a loss after all expenses. You need to make the assumptions that it is always rentable and interest rates remain low to commit to this investment.

Majority of the 80 units are 1 bedders. 3 bedders come with 4 bathrooms so you can even convert the living room into another bedroom. What kind of tenants are the developers asking the buyers to target?

Notice you can build a door to split this living room to become a bedroom

Given current market, it is fairly difficult to achieve 7% consistent returns on investments. A 23.5% P.A investment seems extremely attractive, especially for a single like me who do not mind staying anywhere that is convenient. However, the PSF price seems so high that there is little room for capital appreciation. Unless the project is selling below $900 PSF, there is little margin of safety given the inertia of existing brothel houses and budget hotels.

Would you buy this project?

SBC wouldn’t.



HDB prices will come down because

1) Genuine HDB upgraders to private homes will have higher incentive to sell their HDB now. They can save 7%-10% (for PRs) on stamp duties and possibly obtain the full 80% loan of the valuation of private properties. (Though most HDB owners who buy 2^nd home for investments are likely to have fully paid off their HDB mortgage.)

2) PRs can no longer sublet their HDB homes and they are likely to sell off their HDB in time to come as it is no longer a viable investment vehicle for them. This creates a larger supply of resale HDB in the market, creating downward price pressure.

3) The current market has fears of increasing population with limited housing. The government has time and again reassured the market with its ample supply of housing pipeline. Most HDBs transacted at high prices are relatively old, some above 20 years old. Technically, aging homes should depreciate accordingly as their lease shortens, however, due to mismatched supply and demand by policies, it has appreciated, going against economics principles. This phenomenon will revert to classical economics when supply and demand reaches the equilibrium. Again, this point to lower HDB prices in time to come.

4) MAS has set a Mortgage Servicing Ratio (MSR) limit of 30% for loans granted by MAS-regulated financial institutions for the purchase of HDB flats. This means that financing has been tightened on HDB resale purchasers and they may not even qualify for the loan after paying hefty COVs. For instance, a couple earning 8,000 a month on 30 years loan can qualify a maximum of $534,000 loan and HDB valuation of $667,000. If they are above 35 years old, their loan tenure will be shortened, lowering their loan quantum. Hence COV are likely to come down due to stricter financing rules for HDB. Interest rates have to be assumed at 3.5% when calculating MSR. This policy will hit large, pricey HDB homes.  

5) Private property owners who have bought new homes in 2011 onwards should not be expecting much capital appreciation on their properties, since many developers are offering lower prices now. Property as an investment vehicle will lose it shine as rental starts to fall gradually and vacancies start to increase. A Singaporean property owner who buys another 1M property will have to cough out almost 100k in stamp duties. Assuming a 3% rental yield, the breakeven period is at least 3.5 years! A PR will have to cough out almost 130k in stamp duties, with breakeven period of 4.5 years! This does not factor into the rental decline and vacancies risk. Property tax, agent fees, income tax on rental income will continue to eat into the returns of investors yield. Hence, attractiveness of private property as an alternative investment will decline significantly. The correlation of private (non landed) properties to HDB is 0.9. This means that decline in private property prices will have a 90% impact on HDB.

Conclusion

With massive supply of properties in the HDB and private market coming into the market from this year to 2015, aspiring home investors should wait for cooling measures to be lifted before entering the market to invest in properties.

Home seekers should wait at least 6 months for reality to sink into their heads to lower their asking prices before entering into the resale property market.

Overpriced new launches will see developers dangling more discounts, stamp duty rebates, rental guarantee, furniture vouchers, tour packages and other innovative packages to move sales. In this situation, the late bird will get the best deals.

Hong Kong Small Size Properties

I have always like Hong Kong and have stayed there several times during my course of work and leisure. I remembered staying in one of the islands know as Pak Lai Wan for a couple of weeks and I was extremely impressed by the smallish apartment.

The apartment featured here is about 750 sq ft and costs SGD$660k. It is extremely decent, with 2 bedrooms and a seaview of the QingMa bridge.

Cars are not allowed in the island and residents can either take a shutter bus or ferry to reach their homes. It is 20 minutes ferry ride to Central (10 mins interval on average) or 10 minutes shuttle service to and fro Tsuen Wan. This is really pollution free place!

I am really amazed by just how they can pack good quality furnishings into a compact apartment without you feeling suffocated. Full condo facilities and a heated pool. Perfect!

If you are staying at this kind of apartment anywhere in Singapore, it will definitely cost you at least 2x the quantum, not forgetting you will not get the views below...
Getting up early in the morning with such views, no matter how small your living space is, you feel that you are having the whole world! This is first hand experience, honest!

Conclusion: Singapore property is too expensive, even by HK standards!

MRT stations of the future

Currently properties with MRT stations command a high premium. With the upcoming Eastern, Bukit Timah, North Coast, Downtown lines, more and more houses will be near MRT. In fact, any house will be near MRT stations!
Link to map

Perhaps by then houses away from MRT stations will command a higher premium instead!

A Visit To Esparina Residences

I was driving near Sengkang and decide to pop by the new EC, Esparina Residences. The prices were extremely competitive!

As more than 90% were sold, only 2 bedroom units were left. This is a peculiar phenomenon as usually 2 bedroom units were the 1st the be snapped up in any new launches. As this development is an EC, the main barrier is $10,000 household income. I was interested in a 3rd floor 2 bedroom unit.

The prices were really reasonable. A 2 bedroom 829 sq ft unit, morning sun with blocked afternoon sun and facing a garden, it costs $617k before CPF grant of $30k.

TOP is expected to be in 1st quarter 2014. PSF price works out to be $744.

I believe this is a good buy, stay invest unit for a couple of reasons.

1) 5 mins to Buangkok MRT

2) Low financing rates

Based on 20% downpayment (5% cash 15% CPF), loan amount required is $493,600

Monthly installment before TOP is in the range of $157-$659.

Interest rates are assumed to be 1.05%, 80% financing and 40 years loan tenure.

Upon TOP, monthly installment of $1023; after one year certified statutory completion (CSC), $1259

3) Good Investment potential

If one would want to take the chance to rent out the unit upon TOP (illegally), the expected rental is $2k (minimum) after taking into account the $180 monthly maintenance.

That works out to be a 4% yield based on purchase price. The leverage of 5x will mean yield to be 20% based on 20% downpayment.

Even if one stays for 5 years and sell in 2019, the expected price based on The Quartz selling price now is projected roughly to fetch about $750k-$800k, conservatively.

One can earn at least $130k in 10 years time, or an annually compounded return of more than 10% based on my downpayment!

4) Walking distance to 24 hours fair price and Kopitiam. All amenities has been set up, critical mass attained. More amenities will be available.

5) Land parcel near Esparina Residences is up for tender to private development. This would further support its price in the medium term.

Alas! If only I am eligible....

Property Bubble?

It's quite worrying when almost everyone I know starts buying property for investments. Table 1 shows the pipeline of project due, extracted from URA.

Table 1

We are expecting 2,000 odd units to be completed by end of 2010. Supply will still be low in the region of 6,000 completed units in 2011. However, in 2012 there will almost be a 50% increase to 9,000 odd units, followed by a YOY 100% increase of completed units in 2013.

This is almost a 300% increase as compared to 2011!

In 2014, 15,000 units are expected to complete, which adds to the glut of supply. Should interest rate rise to 3.5% then, the influx of supply will lead to further rental depression due to high cost of funding. Investors will be selling cheap when their rental yield cannot cover the interest rate they are paying to banks.

The average net rental yield is about 3% now. I believe we will be seeing a downtrend of rental yield from 2011 onwards together with a apike in local interest rates.

Perhaps one should buy a HDB now and wait for fire sale in 2015.

I might be wrong though.

Measures to curb property speculation finally revealed

Today’s papers reported that measures are rolled out with immediate effect to curb property speculation. In layman terms, they are:

(1) Sellers to pay stamp duty again if they resell the property within 3 years of purchase. (A $1m property attracts $24,600 of stamp duty.)

(2) For buyers who have outstanding loans with banks or HDB they

(a) need to pay at least 10% in cash for downpayment, instead of 5%.

(b) can only loan up to 70% of property valuation limits.

Looks like the government is intervening as the property market astronomical rise is going out of hand and they can only continue to roll out measures in a such manners to react accordingly.

I feel that more can be done to curb the property craze. It is a good thing that government is trying to balance speculative interest from real home seekers. However from my observation, most speculators are already sitting on high paper/real profits; the people who are trying to buy now are real home seekers.

That’s truly an irony.

Then again, what is the definition of speculator? If I am investing in property because I want to leverage on cheap interest rates and earn rental income for 10 years before selling off, am I a speculator?

Actually, I am only trying hard to save for retirement. With the stock market increasingly unpredictable, savings interest rates at 0.2%, buying a property seems to be the next best alternative for anyone who can cough up 20% downpayment.

Yet again, I am always priced out.

I applaud the government for proactively solving problems. But may I suggest that they stay on top of our problems by reacting before they even surface?

Prevention is better than cure, am I right, Mr. Govt?

Are HDBs affordable at all?

With reference to my earlier article, I have calculated that a couple who bought a decent 3 bedroom unit at Dakota Residences will have paid about $3.3M in interest and principal. It is an awful large amount of money. I would never even dare to dream I have that kind of money!

What about HDB?

Let us now consider the cost of HDB from a cost-salary historical perspective. I draw the following information from Lianhe Zaobao, 6/9/09, written by financial columnist Xu Li Qing.

In 1970s, a 3 room HDB flat costs $8,000. A fresh graduate then earns $1,000 monthly. It is about 8 times his salary. Of course it was extremely rare to have a graduate then!

In 1980s, a 3 room HDB flat in Ang Mo Kio costs $40,000. A fresh graduate then earns $1,600, which translates to 25 times his salary.

Currently, a 3 room HDB flat in Ang Mo Kio costs $270,000. Compared to a fresh graduate’s salary of $2,700, it is 100 times his salary!

HDB prices have increased 12.4% (compounded) annually and our salary has only increased 3.4% (compounded) annually.

In simple words, HDB prices have since increased 30 times, compared to 2.7 times our salary since 1970.

And HDB has always maintained that prices are reasonable and affordable. I supposed it is, for the higher income families!

This explains why dual income is the dominant income model for most families. It makes houses 50% more affordable!

It is not exactly a wonderful feeling to know that my entire portfolio of stocks is barely enough for a 4 room HDB flat or a 20% down payment for a 2 room apartment.

When can I afford to buy my own house?

A visit to Dakota Residences

I visited Dakota Residences over the weekend. There was no crowd, just a couple of families looking at the showflat and the architectural model.

Currently Dakota has fully sold its 2 bedroom apartments and are left with few units of 3 bedroom apartments. 4 bedroom apartments are still plentiful as there are little takers.

I enquired about the 3 bedroom apartments. They cost a minimum of $1.16m or $889 psf for a low floor unit, with an area of 1313 square feet. Similarly sized unit but at 17^th floor, costs $1.33m or $1014 psf.

Seriously, for a 99 year leasehold property I do feel that such prices are out of the reach of ordinary Singaporeans.

Let the numbers tell you why.

Assuming I pay a 20% downpayment to purchase the 17^th floor unit, I will need to take out an 80% loan which will mean a monthly repayment of nearly $4,800 @ 3.5% interest. I would have paid about $2m for the house after 30 years.

(I used 3.5% interest as it is usually the interest rate banks use to calculate the affordability of individual income on the house and to be conservative)

After 5 years, my outstanding loan will be about $956,530. I would have paid 60 months of mortgage installments amounting to about $288,000.

If I intend to sell it in 5 years, I will need to sell it at $956,530 (to cover outstanding loan) +288,000 (interest and principal paid) +266,000 (down payment paid) = $1.51M just to BREAKEVEN.

This amount does not include legal fees, stamp duty, renovation, insurance, maintenance fees and other miscellaneous expenses.

Dakota Residences site was purchased at height of property boom in June 2007. It is understandable that the price that developers set need to be profitable to the shareholders, after paying hefty remuneration to the company directors, CEO, senior management etc. They probably need to achieve at least a net profit margin of 15%-25% to ensure that shareholders are happy on their equity investment.

The site next to Dakota Residences was sold at a slightly lower price (per plot ratio) to UOL recently. Personally, I might not buy Dakota Residences even if I have the full cash to pay for one apartment.

Firstly, I would need to endure another 3 years of construction noise and dust at my residence while the 2^nd condominium project is being built.

Secondly, the apartments might be priced lower by UOL to entice buyers.

Thirdly, I went for hawker fare at old airport market and found the food rather mediocre. The hawker centre has poor ventilation and you can smell where the toilets are.

Lastly, I have the choice to buy a 5 room HDB nearby at $650,000 and use the spare cash for gym membership and a trusty Japanese car. Who need a door step MRT then?! I would have saved at least $2M at the end of 30 years!

Perhaps buying stocks is still safer for some of us now.