Tuesday, August 18, 2009

Property as Limited Resources??

I watched the Channel 8 news recently and saw an old lady being interviewed when she happily got her unit after balloting for the new condo. She proudly said "My retirement depends on it. I shall use the rental to fund my retirement." In my mind, I was thinking hard if this is a good way to plan for retirement?

Today, URA website showed developers sold 2,767 private homes in July, smashing the previous monthly record of 1,825 units that was set in June. This news makes me wonder if we are still in recession. Is this property boom a bubble or an opportunity? I don't have an answer as only time will tell. I only know that the risk is very high for those who enter the property market now.

A lot of people had discussed on the topic of property investment, I like to take this chance to share my 2 cents worth of thoughts and to analyse why Singaporeans like property so much?

1. They view property as Resources
* Not only they feel that its a resource. To them, its a limited resource. "You missed it? Thats it!!! You lost a great chance to own that resource that will surely rise in value."
* To them, Singapore have limited land and population will keep increasing with the influx of foreign talents. Demand will always exceed Supply.
* They probably didn't notice that the houses built are getting taller and more supply are coming in the next 1-2 years.

2. They only look at the positive side of Leverage
* Leverage is a double edged sword. Presuming that you borrowed $400,000 for a $500,000 property. You only pay $100,000 upfront. If the property value increased by $50,000 and you sell at $550,000. You would have made 50% from your $100,000 that you put in. Sounds good. Isn't it?
* What if the property value drop to $450,000? Maybe they din think of that.

3. They don't know how to calculate the Rental yield
* They know that they will get rental but do they really know what rental yield is about? Their rental yield not even be even enough to cover the mortgage interest.

Rental Yield = (Net Annual Rental / Total Property Cost) x 100%
* Net Annual Rental = Your total rent collected minus off the cost of obtaining the rent such as maintenance, conservancy, property tax, income tax, agent commission, vacant cost, etc
* Total Property Cost = Property price + Stamp Duties, Legal Fees, Furnishing cost, renovations, etc.
* Many people probably just use the (Yearly Rental/Property Price) x 100% without deducting all the other expenses.
* The fact now is "Rental Yield is down, Property price is up". In my opinion, not logical and is more of a sign of speculation.

4. Their Capability to view property as Long Term Investments
* Buy property, they are capable of viewing it as a long term investment because even when market is down, the property is still there. They will not feel so painful if they don't sell the property.
* Compared to Shares or Unit Trust, very short term view, very emotional. Drop a bit only, feel very painful.
* They are just different asset class. Financial market have their distinct market cycle but Property cycle? Wow. Hard to say leh. Remember the property crash in 1996? It took nearly 10 years before the prices pick up to its near original prices.

5. The Teaser Housing Loan Rate
* Some of the housing loan was as low as 1.6% for the 1st year and around ~2.5% for 2nd and 3rd year. If a loan of $400,000 was taken over 30 years, the monthly instalment is as follows:
*1st year - ~$1,400/month
2-3 year - ~$1,570 / month
Sub years(Assume rose to 4%) - Can go up to as much as $1,850/month
* Does the Sub-prime issue rings a bell to you? Affordability becomes an issue when interest rate rises.

Other points to note:
* Property investment is not for everyone. We got to be very prudent in putting such a huge sum of money into it. Invest within your own means. Leveraging can cut a watermelon but it can cut yourself if you are not careful.
* Property cycle can be a very long cycle. If you catch at the wrong part of the curve, your property will age with the curve. When new launches comes out in the new cycle, your property may not be in favour anymore.
* We are still not out from recession, the US economy is still bad. No one knows the full effect of a prolonged poor US economy. We see shoots but how long will these shoots matures into a forest again? The property cycle might comes a bit too early.


Anonymous said...

Howlians don't buy your arguments...
they only want to show off. commit 50% of income to service the loan.

Anonymous said...

If you bother to search backdated news you will also probably see some of those minibonds investors praising MAS and the financial institutions for providing the opportunity for them to create wealth by packaging structured notes. All I can say is that Fools and their money will soon be parted.

Anonymous said...

Property prices always go up, similarly rentals also always go up, never has rental or property price come down.

Property is the best investment for a Singaporean

Collin Yeo said...

Fancy <2% interest mortgage payment for the WHOLE of loan term?