Disastrous investments in the property market: Lessons (Updated 5 July 2018).

UPDATE: 5 JULY 2018

History doesn't repeat itself but it rhymes or so they say.

Apparently, people are flocking to showflats to buy condos now and they are likely to be at it until midnight.

Many property agents are definitely enjoying a feeding frenzy as buyers panic buy.

Why the panic buying?

ABSD is going up 5% and LTV is being tightened as well.

New rules kick in at midnight.





Yes, the government has come up with another round of cooling measures.

In recent years, I have said that private real estate prices in Singapore are too high and that it does not make good financial sense to think of them as good investments for income.

Vacancy rate is still very high and in some places like Geylang, rental rates have fallen by as much as 25% due to a glut in supply.





Buying and thinking that prices can only go up is speculation and with the enormous price tags of private real estate here, it is big time speculation.

I have also blogged that unless we have deep pockets, it is best to avoid.

Still, many people are throwing caution to the winds but beware how it could get blown back as a nightmare to hit us in the face.

People rarely make money buying real estate in a market euphoria but they usually make money buying when Mr. Market is depressed.

This certainly has been my experience.





The Government has raised Additional Buyer’s Stamp Duty (ABSD) rates as well as tightened the Loan-to-Value (LTV) limits for Singapore citizens and permanent residents, in order to “cool the property market and keep prices in line with economic fundamentals”.

With immediate effect, the ABSD rates will be raised by 5 percentage points for all individuals, and 10 percentage points for entities, said a joint statement issued on Thursday (July 5) from the Ministry of Finance, the Ministry of National Development and the Monetary Authority of Singapore.

There will be no change in ABSD rates for Singapore citizens or permanent residents buying their first property.






Previously, the LTV limit for a buyer’s first housing loan is 80 per cent, or 60 per cent if the loan tenure is more than 30 years or extends past age 65. This will be cut to 75 per cent, or 55 per cent respectively. 

Similarly, the limit for a second housing loan will be reduced from 50 per cent to 45 per cent, or 30 per cent to 25 per cent if the loan tenure is more than 30 years or extends past age 65.

Read full article here:
https://www.todayonline.com/singapore/government-introduces-new-round-cooling-measures






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I read in The EDGE that there will most likely be "a new level of pain" for landlords of residential properties in Singapore next year because rents and prices of properties are sinking while vacancy rate continues to rise.

Regular readers would remember that I said that the writing was on the wall in 2011 and that there was too much euphoria in the air as people just kept flocking to condominium showflats and buying into every new launch there was until a year and a half ago when the 8th round of cooling measures with stringent TDSR was introduced.

Some of us might remember this report in The Straits Times:

Some home buyers rushed to submit mortgage applications to banks last Friday night before tougher rules on home loan financing kicked in at midnight.

But a day after the Government's move to tighten home loan financing, the overall effect was muted as only a small segment of buyers are likely to be affected, agents and mortgage consultants told The Sunday Times yesterday.

Developers said it was business as usual at show-flats and they still managed to sell a few units yesterday.

The Monetary Authority of Singapore (MAS) said on Friday that banks have to use a standardised set of guidelines to assess property buyers' ability to borrow. It also plugged a loophole that let buyers dodge tighter loan-to-valuation limits on their second and subsequent properties.

The restrictions apply to loans with an application date on or after June 29.

As a result, some buyers hurried to submit loan applications before the Friday midnight deadline. A significant number of these were buyers at J Gateway, which reportedly sold all 738 units at its Friday launch.The Sunday Times understands that OCBC received a surge in loan applications on Friday night after the MAS announcement. 

(Source: The Straits Times, 30 Jun 13)

These buyers probably would not have been able to obtain bank loans with the new measures which are there to encourage financial prudence. 

I won't be surprised that some of these buyers had bought multiple properties too. 

This "kiasu" mentality that is born from greed is likely to be the downfall of more than a handful of such "investors".






In the last few years, I continually warned that we must be cautious about buying residential properties in Singapore in order to avoid wealth destruction unless it is a BTO flat or an EC or we have spotted a great value buy.

New launches usually have priced in future price appreciation. 

Have you wondered why a new project is almost always much more expensive than the surrounding condominiums? 

Is it only because the land cost is higher? 

So, it is difficult for buyers to make money from these purchases in a short time of a few years unless the euphoria continues. 

It is a game of musical chairs and the music (i.e. euphoria) will stop.

J Gateway

484 sq ft shoebox units in J Gateway sold for as high as $1,774 psf in July 2013. That is a price tag of $858,616! 

Freehold? 

Nope. 99 years leasehold. 

Yes, we know that Jurong is a promising location as our government has plans to develop it into a more robust regional centre but it just doesn't make much sense to me to pay so much for the place now. 

If that is not pricing in future price appreciation (the price would probably only make sense many years down the road), I don't know what is.






So, in the next few years, these buyers would have to service their housing loans (in an environment of increasing interest rates) and hope for the best, bearing in mind that there will be no rental income as the condominium is being built.

Now, with mortgagee sales (i.e. properties foreclosed by banks) rising and some expecting them to rise to 2008-09 levels as distress spreads from luxury condominiums to outlying areas, people who have been waiting for a meaningful correction in prices before making a purchase are going to be amply rewarded for their patience. 

Things are likely to get worse.






"Newly completed condos, including shoebox apartments in the suburbs and on the city fringe, have also popped up at auctions as mortgagee sales in recent months.... some investors holding on to multiple units may have difficulty servicing their mortgage or unable to secure tenants in their newly completed units. Collier's Ng believes, however, that mortgagee sales of upscale apartments in the prime districts will continue to dominate the auction scene. " Source: The EDGE, 29 Dec, page CC9.

Evidently, there are areas which are going to be worse off than others and if you are thinking of buying an investment property for rental income, I have said before that properties in the RCR would be more resilient and the data has supported this but, remember, if you overpay, you won't do much better at all. 

"... the leasing market is going to be more challenging in OCR and CCR, notes JLL's Ong. He sees condo units in the city fringe or RCR faring better. The city fringe is close to the city and yet more affordable. Rental decline in RCR so far has been the mildest." Source: The EDGE, 29 Dec, page CC2.







When I said that the government is determined to bring down the prices of residential properties in Singapore and warned that we should not underestimate the political will of the country's leadership, there were still many optimists out there saying that demand would stay strong enough to prop up prices. 

Recent speeches by Minister Khaw Boon Wan and DPM Tharman Shanmugaratnam indicated that prices are still too high. 

The cooling measures are staying in place.

Some might remember this from October 2013:


Alan Cheong, head of research and consultancy at Savills Singapore, made his case last Friday at Carlton Hotel marking Singapore Management University's (SMU) homecoming celebrations for its Master of Science in Applied Finance programme.

"I think barring external shocks, property prices, residential prices will stay elevated," he said.

Mr Cheong argued that a fundamental concern that there will be an oversupply of homes come 2015 is not the case at all.

"The reason is in Singapore; it is a situation of undersupply."

Source: ST Property






There are many lessons in this blog post and not to ask barbers if we need a haircut is only one of them. 

It is good to refresh my memory from time to time.

Related posts:

1. Selling a private property just got harder. (2011)
"This development is likely to hasten the weakening of private residential real estate prices which is something I expect to become really evident in 2014 or 2015.  "

2. Leverage up and buy investment properties? (2012)
"... it is obvious to me that the government is sending a clear message that they want property prices in Singapore to lower in the next couple of years.."

3. To rent or to buy: Rule of 15. (2013)
"For a while now, we see people buying real estate in Singapore and being quite happy with rental yields of 2+% to 3+%. This is acceptable really only because of the abnormally low interest rate environment. It won't last."

4. Ask these questions when buying properties. (2014)
"... for the more adventurous ones in our midst, please think again and again before handing over that cheque when temptations find their way into our mailbox."

5. Affordability and value for money.
"... we should remember that it is not about "affordability", it should always be about "value for money".

HOW IS SHOEBOX APARTMENT LIVING IN SINGAPORE? (AK's home is a hut in the sky and it makes sense.)

UPDATED:
Seeing how some people in Hong Kong are living in apartments ranging from 150 square feet to 200 square feet in size makes me feel like I am living in luxury!
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I keep telling people that my home is a hut in the sky. 

It is a tongue in cheek way of saying I live in a high floor shoebox apartment. 

Yup, it is one of those apartments smaller than 50 sq m (538 sq ft) in size described by the ex CEO of CapitaLand as "inhuman". 

Of course, he was not the only one who had something negative to say about shoebox apartments.




To be quite honest, I was a sceptic too. 

My old place was almost 1,000 sq ft in size, had two bedrooms, two bathrooms, a big kitchen, a big living area and a balcony. 

Almost everyone who visited told me then that it was a perfect size bachelor pad.

At the time, I already had friends staying in shoebox apartments and I knew what a 463 sq ft apartment looked like. 

The first word that came to mind when I visited the place was "tiny". 

Space was tight. 

In between furniture and fixtures, there was only enough space for one person to walk around. 

Well, maybe two if the people were smaller in size.

Tiny!

So, it was a leap of faith for me to buy a shoebox apartment more than two years ago and, to be quite honest, I was somewhat worried about the space issue after the whole deal went through. 

I made copies of the floor plan of the apartment and made scaled measurements of furniture, exploring different ways of making everything fit while still having enough room to move around.

Now, having lived in a shoebox apartment for a while, I find that they are, actually, very livable. 

The trick is not to clutter up the apartment with stuff. 

Staying in a shoebox apartment makes people think more carefully about what they buy for their home. 

The question "Is this necessary?" takes on another layer of importance.


Kitchen is in the living room? Yup!

For me, the necessary furniture to buy in a shoebox apartment would be:

1. A bed.
2. A wardrobe.
3. A sofa.
4. A desk and two chairs.
5. A TV console.

Depending on the size and layout of the shoebox apartment, smaller size furniture might have to be considered. 

However, if the apartment is not smaller than, say, 441 sq ft, and the format is not oddly shaped, pretty decent size furniture, including a queen size bed and a two seater sofa should be able to fit quite comfortably.

I have learned to appreciate that living in a shoebox apartment has many advantages and, strangely, although I had much more space in my old place, I do not feel that my current home is less livable. 

Let me see if I can rattle off a list of things.

Tiny apartments are the norm in Japan.

1. The first thing that comes to mind is that there is less underutilised or wasted space. 

I had lots of space in my old place but most of it was underutilised.

I paid for space I was not using.

When I sold my old place after staying there for more than 4 years, I remember that the kitchen was in an almost pristine condition.




2. There is less cleaning to do in a shoebox apartment which saves me a lot of time. 

I remember that a thorough cleaning of my old place, including the underutilised kitchen, took me almost 6 hours! 

The shoebox apartment takes me less than 2 hours to clean.




3. Financially, the shoebox apartment is less burdensome as it was much cheaper to buy and I also pay less in property tax. 

We always hear people saying Singaporeans are asset rich but cash poor. 

Although not always the case, many people "over consume" when it comes to their homes. 

Real estate can be good investments for income but, unless we have and are willing to rent out spare rooms, our homes are consumption items.

Paying less for my home means that I have more money to invest for income.




4. I enjoy equal access to the facilities in the condominium which includes the car park but I pay much lesser in monthly maintenance fee compared to my neighbours who bought the larger units in the condominium. 

Of all the facilities available, why did I mention the car park? 

Isn't that the most boring thing on the list?





Well, I remember telling some friends that considering the fact that a car park lot is about 100 sq ft in area, I got a pretty good deal since bigger units are also entitled to only one car park lot each. 

Proportionally, a 441 sq ft apartment would gain 22.6% more space while a 1,034 sq ft apartment would gain only 9.7% more space, for example. 

Interesting, isn't it?



I thought this was somewhat extreme.

Anyway, although we might feel unhappy with the rising costs of living, as long as Singapore's economy chugs along nicely, things will only become more expensive over time. 

So, apartments will become more expensive too. 

Smaller formats are more affordable, for sure, but beyond affordability, many are concerned about whether they would compromise on the quality of life.

If we believe that a HDB 4 room flat, 970 sq ft in size and has 3 bedrooms, is about right for a family of 4 or 5, then, each person in the family would have 242.5 or 194 sq ft of space, proportionally. 

A shoebox apartment that is 441 sq ft in size would, therefore, provide plenty of room for a single person or even a couple. 

It is all relative, isn't it?





Finally, I have been watching a program called "Tiny House Nation" recently. 

This is a movement in the USA and we all know how the Americans love their big houses. 

I remember a friend from the USA told me that a 1,300 sq ft apartment was tiny for a family of 5 when I was staying with my parents in an apartment which was about that size.

Anyway, I really enjoy watching "Tiny House Nation" and to learn that more Americans are downsizing, being less wasteful and more environmentally conscious.

Images from "Tiny House Nation."

"In “Tiny House Nation,” renovation experts and hosts, John Weisbarth and Zack Giffin, travel across America to show off ingenious small spaces and the inventive people who live in them, as well as help new families design and construct their own mini-dream home in a space no larger than 500 square feet."

If you want to find out more about "Tiny House Nation", here is the link:
http://www.fyi.tv/shows/tiny-house-nation/videos

Shoebox apartments might not be right for everyone but they could be right for some. 

Definitely, we could live large in a tiny home.




Related posts:
1. Housing and the CPF.
2. Slaving to stay in a condominium.
3. Affordability of housing in Singapore.
4. How big is a 452 sq feet apartment?
5. Smaller apartments' prices more resilient.