Why I dread going to a Property Showflat

There was a time when I do enjoy going to property showflats. I guess if I am single, with more free time during the weekends, I would probably make this a regular weekend thingy.

Oh yes, ever since, property agents have been constantly spamming me with news of new launches, huge turn out on launch days and developments which managed to sell a high percentage of units during the first few weeks, etc. Basically stroking the FOMO mentality.

However, with my weekends typically spent with my family: Eg. just taking care of the kids, or bringing my kids out (for fun or for the enrichment lessons), running errors, etc…. there is usually little time to go visit showflats. Well that is just one reason.

By the way, the no. of unit sold taken from URA’s data is based on the OTP (Option to Purchase) lodged. It does not account for those OTP that has lapsed / not exercised / withdrawn. This suggests sales volumes were much lower than reported, and developers were until only recently, re-issuing Options. The recent article (see below) on new regulations whereby developers can no longer re-issue an OTP to the same buyer for the same unit for 12 months after the earlier OTP expires. – meant that more OTP will finally be not exercised. Nevertheless, there are ways to get around it (OTP by the other members in the same family eg. husband/wife, and as mentioned some of the developers have been absorbing the forfeit fees).

New guidelines to encourage prudent private home buying (read here)

Developers re-issuing options amid cooling market, launch bonanza (read here)

1) Different Points of View

You see for a very long time, me and my wife view property from two very different fundamental view points.

Ok, just to get the facts correct – for some time, I have thought about having a 2nd property, for her case not necessarily, it could be an upgrade from our current HDB apartment unit.

She views it as an upgrade in lifestyle. I view it as a form of investment (can’t do it with one property which we are staying in… unless we rent out the rooms).

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My thought for a place to stay is probably the same as Loo Cheng Chuan’s. Loo, as he prefers to be addressed by, is a big advocate of using one’s CPF in order to build up their retirement portfolio. Basically, I don’t need a million++ house to rest my butt. I am quite happy staying in my HDB, while investing to get some passive income.

2) Does not make Financial Sense

I am sure many of you reading this blog are yourself equity investors. Hence you ought to be quite familiar with the terms P/E ratios, dividend yield, ROI, etc. As someone who has many dividend income stocks yielding min 3%+… The rental yield of private residential properties in Singapore just does not appeal to me.

Property Jargon of the Day: Rental Yield (read here)

To quote the above article: “The typical rental yield for a residential property in Singapore – as of 2019 – is between two to three per cent. Most residential properties have a net rental yield of around 2.3 per cent.”

Yes, we hear a lot from property agents talking about capital price appreciation of residential properties over time (not necessary true for all developments). However, seldom do we hear about rental yields.

If we go deeper looking through a longer horizon, it would be very obvious.

The Private Residential Property Price Index which compares the recent prices to prices in Q1 2009, shows that it has increased approx. 52%. See below (basically Q1 2009 is the base 100, and 152.1 in Q1 2020 shows that it has increased by 52.1%).

However, if we look at the Private Residential Property Rental Index, we can see that rents have not been increasing as much. Q2 2016 was 103.4 (eg. 3.4% increase from Q1 2009). Basically, I see it as negligible. It literally collapsed in the financial crisis and stayed at that level.

And since I am talking about a 2nd property (and since I am currently holding a HDB unit, hence cannot decouple and buy the property as a 1st property), the ABSD Rates on/ after 6 July 2018 for a Singapore Citizen buying second residential property is 12%.

So yes factoring in that 12% on top of the purchase price drastically reduce the already meagre rental yield (and that is not even including all the other upfront / annual fees and tax involved).

Basically, I look at the nearby newer properties – get the rental rates for similar units there and divide by my expected purchase price.

When I think of AK’s Rule of 15 (read here), I just find it hilarious at this time (To buy). Or will I ever live to see it happening in Singapore.

I could hope for capital appreciation. That used to be my thought in the past. However, with the prolong recession caused by the pandemic, and travel restriction / muted response from foreigner buyers, I am not really banging on that.

In addition, there is no sight of any relaxation of the cooling measures policies by the government (eg. SSD, ABSD, TDSR). And on 8 October 2020, the government announced a further extension of temporary relief measures directed at property developers, including allowing a further extension of various project completion deadlines by six months as Covid-19 continues to disrupt the construction industry. Even with the surplus supply of units in the markets, developers will not be in a hurry to offload these at a cheaper price.

Property developers given another round of time extension for delayed projects (read here)

People say the US Stock Market is rigged…. but the way the Singapore property market is structured (on top of the loose monetary policies in the US)….I seriously doubt if any free market forces will be strong enough to sway prices drastically.

Also, I think for any investment, like my stock investments, they all need time before we can reap any substantial rewards. Although I don’t foresee any sudden upside for my stock portfolio, but I believe given time (like years), I should be able to see some results (while in the meantime still collect some dividend).

After many years of investing in stocks (with some bonds), I kind of see it as part of my lifestyle. I like the idea of slowly building up the portfolio, picking stocks, reading news, watching the passive income grow. To move all that into a property, is like taking away my hobby hahahaha. Well, I still keep some just for fun (which probably is from my SRS account, which can’t be used for the mortgage), but oh well…. it’s not the same.

True, stocks are basically just intangible tickers/numbers on a screen, unlike a property. However, I enjoy the quiet time I have, reading whenever I can find time (like while waiting for my son during his enrichment classes or late at night).

Having said that, with the anemic local stock market performance, high liquidity among many locals (and also thanks to the government fiscal supports), low interest rates… there are still some merits when considering property as an investment.

In addition, from reading the news, I am aware that a large number of HDB developments are reaching/reached the minimum occupation period (MOP). For many potential up-graders it would mean time to upgrade with no penalties.

Around 20,000 HDB Units Annually To Hit MOP Starting 2020 (read here)

Anything Is Possible Until It Is Not – The Dangers of Procrastination (read here)

Then prior to this period, 2 to 3 years back, we also witnessed a surge in enbloc sales. Meaning many cash rich sellers are probably still looking for a permanent place to call home. Among them empty nesters looking to downsize their homes.

4 reasons why Singapore’s en bloc fever has well and truly ended (read here)


3) A Home

Firstly, I think when we talk about passive income / investment… truly passive income (or coming close to it), I reckon comes from financial investments eg. equities or bonds.
For property, it is not really passive. My parents have a 2nd investment property, and they have to spend time and effort dealing with the agent and the tenants. Since the property is still very new, it is not that hard.. but it is not as passive when I compare it to investing in REITs or stocks.

How passive is your income? (read here)

Putting that aside. I think the main draw is really a better living environment for my family.

Many would argue that with the pandemic dragging on, there would be a fundamental change in how we work and live. With my company permanently removing many of our fixed desks/seats and in their places – hot desks / lockers, this WFH arrangement might be permanent. Although I do think our immediate superiors/clients still prefer us to work in the office or attend meetings physically.

So having a nice place to stay and work is important. My wife and me probably have different yard-sticks on how we define nice. There is also a certain prestige that comes with owning and staying in a private property.

There is really nothing wrong with having aspirations in bettering our living environment. A nice home (with the usual creature comforts and amenities) for the family gives one a feeling of comfort and security. The place could also be nearer to better schools, our workplace, facilities, transport nodes, better neighbourhood, better views, etc.

However, it is a fine balance between budget, wants and needs.

To be frank, I don’t consider myself a high income earner, and don’t think we are really loaded.

And don’t see how I can fit my family of 4 into something smaller than a 3 bedder unit.. so yes, we probably have to obtain a mortgage to purchase that 2nd property. After being debt free for many years, the thought of being in debt again (albeit in a low interest rate environment) does not really appeal to us (me and my wife).

Financially, it is a stretch but doable. However, why would we want to do it?… BIG question mark.

Then it also raise the question – what if one of us is jobless, or we have some emergencies down the road, when finances become tighter. Or if interest rates spike?

Well, simply said, a property is just not like other investments (stocks / bonds etc)… With the investment thesis going out of the window, we tend to view it more as a Home – which is basically unquantifiable.

So back to why I dread going to a showflat…
Well, you know that feeling – when you go into a shop to see something nice and shiny yet pricey… you would like to have, but don’t really know if it makes sense, and end up leaving the shop confused.


Yeah that’s why.


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About apenquotes

Born in 1976. Married with 2 kids (a boy and a girl). A typical Singaporean living in a 4 room HDB flat. Check out my Facebook Page: https://www.facebook.com/apenquotes.tte.9?ref=bookmarks
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6 Responses to Why I dread going to a Property Showflat

  1. Mysecretinvestment says:

    Hi Apenquotes,

    I thought I share my “discovery” with you regarding property investment for rental income. Like many others, I used to calculate the rental returns by dividing the net income by the purchase price of the property. So for eg., the cost of the property is $1M, and my net rental income is $25K after deducting cost such as maintenance fees, loan interest payment, agent fees etc., I would compute that the returns as $25K / $1M or 2.5%

    But thats not how “enlightened” property investors do. They leveraged. They dont pay the full price of the investment property, instead they leveraged on a bank loan. And in these times of low interest rates, this leverage works wonders.

    So lets take the case of that $1M property. Lets say you pay $350k and take a loan for the rest at $650K. The loan interest at 1.4% pa will cost you about $9,100 a year.

    Now the net rental income (after deducting cost) is $25K, so the ROI for you would be
    $25k / $350k = 7%

    And if say, after two years, there is capital appreciation of $40,000, then the appreciation ROI is

    $40,000 / $350,000 / 2 years = 5.7% pa

    This is the reason, why property investment is still popular.

    There is of course risks of economic downturn like now with Covid, where getting tenants can be a problem and even capital depreciation. So, one must have holding power to invest in property.

    Personally, it has been profitable property investment journey for me. I compare my networth with colleagues who are happily staying put in their HDBs without investing nor upgrading to private property, my NW came up tops by $2M or more.

    This sharing is not to entice you to invest in property but to give you a perspective of what “enlightened” investors see in property investment.

    Like

    • apenquotes says:

      Hi Mysecretinvestment, thanks.
      Using the example above is we factor in the annual interest payment of $9,100, then the effective income (rental minus interest) wouldn’t it be $25000-$9100 = $15900?
      I am assuming that is an OCR 2 bedroom unit, excluding ABSD (looking at the price and rental amount).
      So the yield is 15.9k/350k? 4.5%
      Still not a bad investment, but that is really subject to interest rates (SORA or SIBOR).
      Yup agree. One must has holding power, after all it is a substantial sum. At some point, it might be negative yielding investment (eg. high interest rate or no tenant or rental rates drop).
      But over time, it might be worth it even with the ABSD. Looking at it as a final place to call home does help.

      Like

  2. Mysecretinvestment says:

    The assumed $25k is already net of expenses. So the gross rental could be $36K for example.

    Interest rates had remained low for the last 10 years. And looks like will remain so for a while more.

    Again, not trying to convince you to invest in property. Its your money and you have to make your own decision.

    Like

    • apenquotes says:

      I see. Thanks for the info.
      However, the purchase price looks low and the rental returns look high – relative to what I have read and observed.
      Could be you have purchased it earlier. Having a good unit (compared to others in the neighbourhood, etc)
      And that is also not considering ABSD.

      Like

  3. Mohd Gaddafi says:

    Depending on your current flat, upgrading to a condo might also mean a downgrade in space. The cheapest condo with the same size as my current HDB costs about 3-4 times (depending if resale or new launch) what i paid for my HDB flat. Plus i don’t drive so the maintenance fee is quite wasted. Do take that into consideration as well! Additional $200-300 a month can add up over the long term.

    Like

    • apenquotes says:

      Yup, about $4k per annual for maintenance.
      Agree that size is a big concern, that is been usual complaint from my wife, if we are comparing to our current HDB apartment (FYI she was complaining about how small our HDB was when we first moved in).
      Condo floor area takes into account the balcony and aircon ledge area… so on paper the numbers may appear similar or bigger, the livable enclosed areas are actually much smaller.

      Of course, it has to be taken in context with the development amenitities, and nearby facilities, etc. For HDB, there isn’t much amenities.

      Like

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