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Buying a property: Affordability and Value For Money.

Wednesday, May 14, 2014

Following my blog post on considerations in buying a property for first timers, a reader mentioned how it is all about location and that if we can afford it, always buy a property in a better location.

"You may baulk at the high price for properties in a good locations. But if you have the budget, go for good locations because when you sell in future, you can also sell for a good price. If you buy a property because it is cheap, it is likely to be poorly located with little amenities and poor connectively. When you sell in future, potential buyer may also "hiam" the place.

"Always buy where there are future potential development (for examples, Paya Lebar, Jurong East and Woodlands have been designated as regional centres under the Masterplan)."

Of course, I think that location is important too. 

However, to me, it is never about "affordability", it is always about "value for money".

"Value for money" is a concept that is location neutral when it comes to real estate. 

It can be quite subjective, for sure, but there is also a high degree of objectivity. 

So, when we have a discussion on this, it is important to stay clear minded about what we are talking about.

Example 1:

If someone had bought a resale 5 room flat in a mature estate for, say, almost $800,000 because he liked the location for some reason while a sale of balance flats exercise could yield a 5 room flat in a non-mature estate which could be had for half the price, should we say that he was not getting value for money?

Well, for some of us, it could be really hard to rationalise away the extra $400,000 that had been paid for convenience and familiarity, perhaps. 

However, to the buyer, the location could be priceless. 

Whenever there is a strong emotive element, objectivity is suppressed. 

Don't discuss because it could disgust.

Example 2:

If someone had bought a BTO 2 room flat in a mature estate for a quarter of a million dollars instead of a BTO 4 room flat in a non-mature estate for the same amount of money with an eye on becoming a landlord, would the better location in a mature estate help? 

With the BTO 2 room flat, he could not rent it out until 5 years later while with the BTO 4 room flat, he could rent out 2 rooms and immediately, it would be cash flow positive. 

Of course, we are talking about doing things legally here.

However, if the thought that the BTO 2 room flat in question could appreciate by much more in price and was, hence, a better buy, then, we would have entered the realms of speculation. 

Don't discuss because no one is the wiser.

Example 3:

If person A had bought a condominium that was a 2 minutes walk from a MRT station at $1,700 per square foot, would he be better off than person B who had bought a condominium of a similar size that was a 15 minutes walk from the same MRT station at $1,200 per square foot? 

Assuming a floor area of 500 square feet, we would be looking at a cool $250,000 difference in price. 

Was the proximity to the MRT station worth that much?

If person A decided to rent out the condominium at $3,000 a month, person B could ask for $2,400 and would still end up with a higher rental yield, everything else remaining equal. 

For a monthly savings of $600 (or $7,200 a year), potential tenants could be more than willing to take a stroll to the MRT station and this is a realistic scenario especially when smaller apartments are more likely to appeal to younger renters.

Example 4:

If someone had found a condominium in a good location but it was asking for a significant (say 15%) premium to the latest transacted prices of surrounding properties (and a 15% premium is pretty normal with new launches most of the time), how would that provide value for money? 

Now, if someone had found a condominium in a not as good location but it was offering a nice discount (say 15%) to the latest transacted prices of surrounding properties, wouldn't that be a value buy?

Think a property in a less convenient location is harder to rent out? Try lowering the rental. 

If there was a comfortable margin of safety in the purchase price of the property, there would be plenty of room to lower prices and it would still give a satisfactory result.

Something I like to remember all the time (but sometimes forget):

"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results." Warren Buffett.

And I said this on my FB wall:

"I would like to play the Devil's Advocate here. A rising tide lifts all boats. I know friends who bought properties in not so good location who saw their properties' values going up by 100% too in the last few years. My properties which were in more prime locations also went up by 100% up to the point I sold 2 years ago.

"I believe that keeping an eye on value is more important and that location is, often, a reason bandied around by vested interests to push up prices. If we could buy an undervalued property in a less prime location, from a value for money perspective, why would we want to buy a property that has priced in future value?

"I am not an expert on property investments. I have just used some old concepts about price and value for money here."

Buying a piece of real estate anywhere is a big commitment and the decision making process is complex although making a decision is easy. 

Considering whether a piece of property is "value for money" should be a part of the decision making process although it is not the only consideration.

However, if all else have been taken into consideration, we should remember that it is not about "affordability", it should always be about "value for money".

Note: All examples provided in this blog post are real life examples that I know of.

Related posts:
1. Buying an apartment: Considerations.
2. Buying a property as an owner-occupier?

My travel blog:
Value for money in a box of Mikans?


pf said...

If I am married, I will buy a property based on affordability and meeting our needs.

Since I am not, I'll be buying next year when I'm 35. It shall be based on value for money.

A luxury (or headache) of choices. :)

AK71 said...

Hi pf,

Having choices is a good problem to have. ;p

Always easier when we have to consider the needs of only one person. :)

pf said...

Actually, not really. Since my parents are not young anymore, wanted to increase their medical coverage. However, they have high blood pressure now. So, either loading too high or many illness excluded. Therefore, I will be getting a flat with at least 3k potential rental yield per month in the event they need this cash flow. Also, for myself alone, I wld need to buy a place where there is room to downgrade. So it has to be a good size, ie 4 room hdb at a good location. At my old age I wld downgrade to a 3 room at a cheaper place.

If I am married, totally different considerations. :)

AK71 said...

Hi pf,

That is a great idea to generate passive income. Unfortunately, I do not like the idea of sharing an apartment with strangers. I am rather anti-social. Otherwise, I would do this too. :)

However, I am not sure that you can generate $3k in monthly rent from renting out the 2 spare rooms. A friend of mine who has a 5 room flat near TPY MRT station gets $1k per month per room and that is considered very good already.

As for buying a bigger flat with a view to downgrade in future, securing capital gains, the success of this is harder to predict, of course, especially with buying a resale flat. Hope to time it right and buy in a correction. :)

KC said...

1k for 1 room near TPY MRT is quite high. I assume comes with aircon and Wifi?

pf said...

I will just move back to my parents place and rent out entire flat. It's allowed by hdb under such circumstances.

Hdb also publishes market rental rates for hdb flats other than resale prices.

AK71 said...

Hi E H,

I would think so. $1K is good money. :)

AK71 said...

Hi pf,

If the entire flat is rented out, yes, $3K a month is quite possible. I guess you are looking at possibly a $500K to $600K price tag for a resale 4 room flat in a good location.

pf said...

500k at good location is almost impossible. Probably below 650k is achievable and below 600k fantastic! :D

AK71 said...

Hi pf,

Wow! Looks like I am terribly out of touch with HDB resale prices. -.-"

$3K x 12 = $36K.

A price tag of $650K means a gross rental yield of 5.54%. Not bad. :)

pf said...

Its not about the rental yield. Its my insurance vehicle. I'm looking at cash flow at times of need in this case.

That said, perhaps I should clarify that I'm not advocating buying a flat beyond capability of servicing mortgage. I did my calculations. :)

AK71 said...

Hi pf,

Let me see if I understand this correctly. If it is an insurance, it means that you will not be renting out the place unless you need the cash flow? That is, it is there if you need it.

Or will you be renting the flat out without any intention of staying there to help bulk up your emergency fund? In this case, I see the flat as less of an insurance but more as a tool to build wealth. :)

pf said...

I'll only rent out the whole unit when I need the cash flow. Actually for medical purposes, there is some form of coverage for an operation or a 1 time treatment. The part I am worried about is continuous treatment over a prolong period of time. For example kidney dialysis, which is probably the worst. Its very cash draining.

AK71 said...

Hi pf,

I see what you mean. :(

I have a friend whose dad needed dialysis. Now, my paternal grandma goes for dialysis. Quite an ordeal for the patients but financially very demanding too.

It is good to see that you have a plan involving real estate in place although I am not sure if an approximately $650K resale 4 room flat in a good location will provide the best result.

pf said...

I'm not sure too. But I have not thought of anything better thus far.

AK71 said...

Hi pf,

I have little experience in this area but I will say that it is a big commitment.

A $650K commitment would scare me if I must borrow the maximum amount allowed. The monthly repayment would be quite hefty even if the loan repayment period were maxed out at 30 years.

Having said this, I would imagine that you have been saving quite a bit of money towards this purchase in the last 10 years or more. So, I doubt you would be borrowing the max. ;)

Anyway, I am just being kaypoh. Just make sure to have a meaningful emergency fund and not to overstretch your finances.

Although the property market here has turned softer, I believe that prices are still nearer the top than the bottom. Might be a good idea to wait and see.

I have a friend who bought a 5 room flat resale in RCR last year. When I suggested that he wait a bit, he told me that there is never a bad time to buy property. I am sure he had his reasons for saying that. :)

pf said...

Haha...I'm of course not borrowing the max allowed. Even if I buy a flat which is at a poor location, its also about 450k. That doesn't allow me to quit job as and whenever I please. In the meantime, I'll try not to be in an emergency. Haha....

Anyway, since I am buying a flat and having a huge commitment. I want it to make my life significantly better. Currently, I am staying at the north. Commuting to the places I usually go takes about 45mins each time. I'm sick of it.

pf said...

Thanks. :)

AK71 said...

Hi pf,

I moved from D3 to CCK when I sold my old place. These days, I hardly bother to go to town even though I drive. The traffic on the PIE is quite terrible.

So, I know what you mean when you say you want to make your life significantly better by moving to a better location. It is about the quality of life. :)

45 minutes per trip means 1hr 30 minutes for a round trip. That is a lot of time to spend commuting per outing. :(

pf said...

You can choose to go to town or not. But for me, I need to get there to work everyday.

I go out to take a feeder bus to mrt at 6am to go to the gym at 7am b4 work to avoid the peak hr crowd. If not, I take the $4 per trip premium bus at 735am and reach office at 840am.

The worst part is if I happen to work late until 9 or 10pm. I have to wait a long time for a taxi to be willing to take me back to cck.

When I am late and in hurry, I cannot get a taxi in cck to where I wanna go...need to call for a taxi.

The 4rm resale price at my area is around 450k. Its not cheap also.

Seriously, if I am taking on a loan. Be it 300k or 500k, it needs to make my life better. Which staying around my current location doesn't work. That's why I am excited to buy a value for money flat...if its 650k, so be it!

AK71 said...

Hi pf,

When you said north, I thought you meant Woodlands. CCK is not too bad. It is more NW than N and We have bus 190. 30 minutes to Orchard Road on a good day. Not too bad, right? ;p

Wow! You wake up at 6am to go to the gym. You are very disciplined. I am ashamed to say that I have not gone to the gym in many years. I tried to restart but the visits have been sporadic. -.-"

If you are looking forward to shorter commutes to and from town, then, definitely, you have to look for a flat in RCR. D3 and D2 will be good choices. D12 is good too, of course. :)

pf said...

I seldom go to Orchard. Need to get to Raffles place to work.

AK71 said...

Hi pf,

Oh, I see. I seldom go to Raffles Place. Very atas. ;p

I work in a warehousing district closer to D14. I live in the boondocks in the NW and go to work in the boondocks in the E. -.-"

Raffles Place? Then, you could consider a flat in D2 as well. That would be perfect! :)

AK71 said...

"If a property is for own stay, value could take second place. There will be many other reasons that will have priority.

"It is when a property is being considered as an investment that value for money becomes very important because the motivation is to make money from the property." AK in FB.

AK71 said...

"In 2009, when the building of Downtown Line stage 2 was out, optimism coupled with speculation drove the COV of HDB flats in Bukit Panjang up by 10 percent in a year’s time. TODAY interviewed property agents who claimed that the COV was up from $25,000 to $40,000, with the highest COV escalating to $120,000 for a five-room flat. Developers also launched a few condominium projects near the future Bukit Panjang station asking for premium prices.

"But in February 2014, Bukit Panjang HDB flats led the drop with almost the biggest drop in overall median COVs among all the districts, according to research by SRX.

"It shows that property prices in the proximity may have a short-live surge reacting to the news of a new development plan, especially amid a booming market. But prices will still drop together with properties in other districts in a bear market.

"And by the time the infrastructure is finally completed, the convenience of being situated next to an MRT station may have already been reflected in the raised prices. Whether prices can climb higher depends very much on the market sentiment and the performance of the property market at that time."


HappyInvestor said...

Hi Ak, wanna pick your brain on the EC segment - this niche market baffles me a little as I am eligible to apply for one but the one launching in JE is expected to come in at $850-900 psf - similar to prices of older condominiums in the area like Lakepoint (about 30 years old). The new launches like Lakeville is close to $1300 psf :) I am tempted to apply for one meaning I have to give up my cash flow positive flat. Sigh ... cant hv my cake and eat it lor. So I have been re-reading your posts on value for money on property purchases, and I am still stumped. This is because I have seen property prices dropped and a Jervois freehold condo could be had for $880 psf in the good old days of 2003... so I am bit pained to pay the same price for a leasehold condo in a surburb, Maybe I should let go of that wishful thought hahah. Agents marketing are saying the price will go up once 5 year MOP is up. Then again, who is to say private condo prices will stay up forever? I am taking to myself here... sure appreciate you sharing some thoughts on this. cheers

AK71 said...

Hi EL,

I don't have a working crystal ball. Maybe, the agents selling the EC have one. LOL.

What I do know is that with ECs, the government is actually giving buyers a margin of safety. Prices can be some 30% lower than surrounding condominiums. The only difference is that with ECs, first owners must wait for 10 years before they can freely resell to anyone who might want to buy.

Now, assuming that property prices should fall 20%, first owners of ECs are not really affected because they have that margin of safety. ;)

HappyInvestor said...

Thanks AK, yes i know about the Crystal ball lol, got polish or not?!! Keke i think i get your drift... thanks much n hv a good weekend!

AK71 said...

Hi EL,

My bowling, oops, crystal ball, has not been very diligent lately. As punishment, no spa treatment for it! ;)

Have a good weekend. :)

AK71 said...

Reader says...
I've been waiting for years to buy a private property as I felt that prices had risen well above fundamentals.

I wonder if there will come a meaningful reduction in property prices which will make it attractive to buy.

What if that major correction never comes?

AK says...
I do not know whether a meaningful correction in prices will come and if it does come, when?

I only know that if it does not offer value for money, I don't buy.

I try to keep things simple for my simple brain. ;p

AK71 said...

Raymond Ng says...

Roller coaster property index.

Major correction will come if there is catastrophic event. Only unknown is when.

Current G property curb has artificially control the uptrend.

If G remove ABSD, TDSR etc... it would means that property is over supply and price correction is underway.

AK71 said...

Ben said...
For those who own property, it's likely that one will have to use the CPF or cash to service the housing loan. It will be much more easier for one who is single and has no financial commitment to save more in CPF as well as cash hoard.

AK says...
I am not against property purchase per se.

I am against property purchase at any price.

To be sure, property purchase can be a good thing if the price is right.

This has been my experience.

AK71 said...

JLL national director of research and consultancy Ong Teck Hui shared her view. He said the move will result in a lower number of units being built in a residential project as well as units generally having bigger floor areas.

"This is likely to have the effect of reducing the average (psf) selling price... With an increased floor area, the psf sale price of an apartment or condominium will be lower as the developer will try to maintain an affordable absolute price for the unit.

"Residential land prices are expected to be also affected given the lower average psf selling prices, he added, which would moderate the trend of rising prices.

As for buyers, a developer who declined to be named said those in the market for biggish units and do not require a new property urgently may hope the downward trend for land prices would translate to more affordable end-unit psf pricing for them. "They may feel it could be worth the wait," he said. "However, those looking for smallish units may feel that the future supply of such units will shrink and therefore it may be good to buy now before the supply dwindles."


millenialsg said...

re-read your article -sounds like deja vu to me

Park Colonial - 1,700 psf, 1 min walk to MRT
Tre Ver - 1,550 psf, 10 -15 mins walk to MRT

10% difference or 100k difference? Not 250k as above...

AK71 said...

Hi millenialsg,

A $100K difference is still a big chunk of change. ;)

If people do some comparative analysis before parting with their money, they can almost always make better financial decisions. :)

millenialsg said...

I think so too...

what do you think of the recent change in URA guidelines on increasing the average size of units in a development from 70 sqm to 85 sqm?

this will impact the supply of shoebox condos and shoebox condos may become obsolete in future... will you upgrade to a bigger unit in the future?

AK71 said...

Hi millenialsg,

With the new rule, far from becoming obsolete, the relative scarcity of shoebox units in future might drive prices up on a PSF basis as the absolute quantum still remains more affordable compared to larger units, all else being equal.

Unless there is a very good reason to upgrade my home, I won't. :)

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