6.9M population? I don't believe...

I do not follow a lot on the ranting of increasing our population to 6.9M. The existing infrastructure have their own constrains to be able to cope with another 1.5M of population. Look at our expressways. If we were to widen the roads, it will cut into temples, homes, pavements. Our main MRT stations are already near to maximum capacity. How much more can they transport? Our cars are already very expensive. Must cars be so expensive that it is only a privilege for the wealthy?  

 

The fundamental argument for population growth is to improve the quality of life for Singaporeans. But what I have experience for the past 5 years of rapidly increasing population is a perpetual downward trend to poorer quality of life.

So many people, almost no space to put them in my BLOG!

 

In a nutshell, we have experienced a 1M growth in population in less than a decade, but I do not see my quality of life improving. Instead, I have to work longer hours as the work market becomes more competitive. I have to handle difficult foreign talents as they demand higher work quality from Singaporeans. Everyday unhappy Singaporeans lament on the increase in population that led to the increase in property prices.

I bought my car at $46,000 when I was earning $46,000 per annum. Today, I earn $100,000 a year, but a similar car cost $140,000. Is my life better?

Back in the same year, an EC at La Casa costs 450k. Today a 5 Room BTO easily cost $450k as well. Is this an improvement in quality of life?

If population growth clearly had not improved my life, why would I believe it will improve in future?  

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.



Beware of BID and ASK Spread for Cars!

Lately out of curiosity, I decided to check out the value of my 7 year old Japanese car. A search at sgcarmart revealed that the same make/model/year cars would have asking prices of between $20,000 to $25,000 depending on mileage and month of registration.

I bought this car in 2006 for $46,000  (no loan) and the car has a residual value in 2016 of $6,000. This means the average depreciation over 10 years is $4,000 yearly, assuming a straight line depreciation accounting.

However, if I can sell my car at $22,000 now (lower end of asking prices), my average depreciation will be ($46,000-$22,000)/7 years =$3429.

This means that I should sell my car now, as if I have held to “maturity”, my depreciation will be at a much higher rate of $4,000 per year!

According to straight line depreciation of $4,000 per year, my car should be worth only $46,000 – ($4,000 depreciation x 7 years) = $18,000.

This calculation is similar to bonds valuation. We should be selling above PAR value since bonds will eventually move towards PAR value when it nears to maturity. However, the switch should be to another similar or higher yielding asset class to mitigate the opportunity costs.

Similarly, what should I switch to, if I were to sell my car now? Logically, I should use the bond valuation concept of comparing it with a 7 year old car. A search on the “car runs” showed similar Japanese/Korean makes, which doesn’t appeal to me, given that I will only be incurring transactional costs without having real benefit.

A 7 year old BMW 523i (2500CC) caught my eye. It has a residual value of $25,000, relatively low mileage of 90,000KM and costs $58,000. If I were to trade in my car for $22,000, I will only need to cough out $36,000 to drive for 3 years and receive $25,000 back in 2016. I will be $11,000 poorer (or $3666 additional costs yearly) in exchange for the experience to be a BMW 523i owner.  

Wow, so cheap after trade in!

 

The allure of it sounds too good to be true. I decided to call the 2^nd hand firm to find out more.

The car dealer is willing to offer what was stated on the sgcarmart website. However, they are only willing to take in $14,000 for my car.

This does not make sense to me. Even if there is a bid and offer spread, it should not be up to 44% {(25k-14k)/25k}

Imagine if I have to sell DBS at $9 (when it is trading for $15) to buy UOB at $19 which is trading at $19 on the same exchange (sgcarmart).

The dealer explained to me the last transacted price for similar cars of my ride was 20k. No one would offer higher than that and they need to earn a mark up (aka brokerage fee).

The high costs totally puts me off. My calculation will tangent off significantly if I were really to trade in my ride for 14k. My depreciation would be 4570 yearly (a 15% increase) and the cost of owning a BMW for the next 3 years will increase to 19k instead of the original expected 11k. 72% increase!!

It is not the 8k that matters (to me), but it goes against my principle of value, market efficiency and fairness. Why would I want to allow middle man to rip me off just because I have a 2^nd hand car to trade in? Why are car dealers “exempted” from transactional costs (whereby they can sell near asking prices) and I must sell my own car 40% below THEIR asking prices?!!  

Technically speaking, I can sell my car on my own first (at 20k-22k) and buy whichever car I fancy thereafter to avoid the hefty “bid ask” spread. This is similar to buying unit trust from fundsupermart at 0% and later transferring out to another service provider (free of charge) to avoid the quarterly platform fees at one and sales charge at another.

But this is too much of a hassle and I rather wait for my ride to be scrapped before shopping for a new/used car 3 years later.

 Notice I analyse general purchase of daily consumer products using frameworks for financial asset classes. This has been my thinking logic for many things and has helped me save/avoid costly decisions.  

 

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.

How to measure your life?

Clayton Christenson, retired professor of Harvard Business School spoke to a group of students about life. He applied his business theories on life and offered some good advices on how to live a good and satisfying life. Prof. Christensen argued that, when we measure our lives, we always mistaken short term tangible indicators such as social hierarchy and wealth as the true measure of a successful life. i.e living in a capitalist society, we are nurtured, so to speak, to measure our lives the same way as how business firms measure profits and losses. In the end, as we are moving to the end of our life, it is how many people in life that we positively impacted and how we stand by our moral principles that are important. As Prof Christensen remarks "God is not an accountant!" He offered this lecture for the young people as an education about life.

Why having an investment philosophy is important

If you are a reader of my blog, you probably have heard of Muddy Waters and OLAM. Let’s look at the 4 charts of OLAM, NOBLE, WILMAR, GOLDEN AGRI .

 

Poor performance relative to local STI. In fact if you look at commodities asset class as a whole, most of them are performing poorly, with the exception of physical gold and oil.

Recall my post here in 2008 where I blogged about my investment philosophy. I wrote at one point on NOT investing in high volatile stocks and assets classes.

“I do not have high risk tolerance and will avoid investing in equities that are highly volatile in nature. S chips, penny stocks and commodities are almost out of my consideration. Unless I have strong reasons and have done due homework, I will not invest in them, at least in the near future.” SBC (2008)

I do not invest in volatile stocks from simple observations. When a stock falls from $1 to $0.90, it only has to rise 11.11% to regain the 10% drop.

 However, if it falls from $1 to 0.50, it needs a good 100% rebound for it to go back to $1. And we know volatile stocks are rarely high dividend counters, there is little hope of even recouping one’s initial capital when you are hit with a 50% loss.

Making good investment decisions are not the most important. Avoiding any bad investment is the critical success factor. Do not forget it is human nature to hold on to losing stocks and selling winners too early. Hence one is likely to book a 20% - 30% gain rather than cutting loss at 20%-30%.

This is the importance of having investment philosophy. Have a sound one and have the discipline to adhere to it.

How many hours did you spend in your car?

My colleague was lamenting that cars used to be cheap to own and he regretted not buying earlier. I need to correct him, car ownership is never cheap in Singapore, especially if you use my calculation matrix.

Ever since I started using a GPS to navigate directions, I noticed that I drive an average of 1km/min. If the journey is 15km, I usually take 15 minutes to reach the destination. Hence my average travelling speed works out to be 60km/h. This is largely consistent with the average speed of most roads in Singapore other than the expressways.

My car has a mileage of 70,000KM. This translates to 1167 hours usage. My car is already 6 years old and the depreciation works out to be 20k, base on current value of my car. Thus it cost $17 to spend one hour in the car! This excludes cost of petrol, insurance and taxes!

If I were to buy a new car now, the depreciation will be about 10k per year, base on my usage pattern, my cost will be $52/h. Prices of car have doubled since 6 years ago, but car usage cost has actually tripled, at least for my case.

I am not complaining on high cost of car ownership, but many people only calculate base on yearly depreciation. If we were to dwell further, the cost of actual usage is extremely high and uneconomical. Sigh, living in Singapore is tough!