Singaporeans love expensive, tiny apartments. Why?

 

 

Property. Every Singaporean’s dream.

 

 

Recently, I attended a housewarming party and a friend of mine commented that it was crazy that Singaporeans are buying one to two-bedroom apartments as an asset. Of course, we didn’t have this discussion in the presence of the homeowner who had invited us. The homeowner had bought a two-bedroom apartment (about 700 square feet) in a 1000 unit condominium for more than S$800,000.

Of course, the homeowner wasn’t the only one. The entire project was basically sold out which is why my friend thought it was ridiculous that they would pay a higher per-square-foot (PSF) price compared to larger apartments. In essence, the lower you pay for PSF, the more space you get for each dollar that you pay.

That’s not all. There’s a second problem with owning property.

It’s not liquid

The problem with property is that it takes time to sell it. You can ask any property agent but I don’t think you’ll be able to raise cash from selling your property if you need the cash in a matter of days.

In the event you are forced to sell due to a market downturn, guess what? A fair number of people are looking to exit too. This increases the probability of making a profitable exit from investing in property.

However, I believe that re-mortgage options are available which somewhat mitigates the problem of liquidity.

Property prices always go up over time

This is perhaps the biggest motivation for the average property investor or an investor of any asset class for that matter. The question is whether this idea holds true in perpetuity.

On one hand, property prices move in tandem with inflation over the long-run. On the other, buildings get older and require maintenance over time. The older an apartment is, the less appealing it becomes for new buyers and renters as well. One of the few things a good piece of property has would be its location. A case in point would be how badly maintained Far East Plaza and Far East Shopping Centre are relative to the malls at Orchard Road, yet owners who bought those units years ago would make many times their money if they were to sell today.

If buyers bought the smaller apartment to stay, they may eventually find that the increase in price may not be enough to help finance the purchase of a larger property unless they turn to the public housing market.

Other than the issue of liquidity coinciding with a fall in property prices, smaller apartments tend to have the largest number of buyers and these buyers, being the middle-class in Singapore, tend to be the most economically sensitive ones as well.

Furthermore, Minister for National Development has thrown a spanner in the works by indirectly hinting that even HDB apartments may not hold their value in the very long-run. And the repercussions are real with some flat owners finding it difficult to sell older flats. The same probably holds for private apartments with a similar land lease structure.

So why is it that Singaporeans still love such tiny apartments?

Affordability

The first obvious point is whether the property buyer can afford the mortgage. Property prices in Singapore are some of the highest in the world. Naturally, this means that almost everyone takes out a mortgage in order to buy property.

Although the PSF may be higher for smaller apartments, the total price, or what we call quantum, is lower. For example, a 700 square feet apartment with a PSF of $1,300 would cost $910,000 whereas a 1000 square foot apartment with a PSF of $1,100 would cost $1,100,000. An apartment with a higher quantum would naturally require a greater amount out of pocket for the downpayment as well as a larger mortgage to service each month.

The best example of this is how some years back, a few property developers launched projects with shoebox apartments (less than 550 square feet) with prices around the $500,000-$650,000. The draw of these apartments was the low quantum but they commanded PSFs of anywhere from a $1500-2000.

No matter the size, most people who bought 1-2 bedroom units were looking to rent these apartments out. Presumably, the game plan is to have renters pay for the unit (including mortgage) over 25-30 years and at the end, cash out by selling the unit or continue to rent the unit and have an additional stream of income.

Leverage

The attraction that most Singaporean property buyers don’t admit to is that buying property allows them access to leverage. What is leverage? This is simply the ability to control more assets with a much smaller capital base.

Banks are in the business of lending and are happy to make loans which have collateral. This is the reason why banks are quite happy to make loans on property given that the buyer passes the required checks on their credit standing.

When buying a property, a buyer typically only puts 20% of his own money in the transaction. This means that you could control an asset worth a $1 million with just $200,000. $1 million may seem impossible to most Singaporeans while $200,000 is much more realistic.

Therefore, why not trade $200,000 today in order to control an asset worth $1 million? Sure, I have to take a mortgage which brings the total amount I have to pay for it more than $1 million but if my renter’s paying for it, then why not? Furthermore, interest rates are low which means the interest cost is low. Leaving that $200,000 in the bank also means that I’m getting next to nothing on it.

For buyers who buy to rent, leverage also makes the rental yield look more attractive. A 4% rental yield on an apartment becomes a 14% if you only have to put 20% down and the interest rate you have to pay is 2%. Sure, interest rates are going up but rents may not remain stagnant either. Leaving that money in the bank or their CPF account* which pays 2.5% is nothing when compared to a 12% return. Read more here if you’re interested in the calculations. Of course, the return would be lower after accounting for taxes, and expenses related to upkeep and rental of the property. Factor in the opportunity cost of investing in another asset and the real return could very well be near zero.

Conclusion

In sum, my view is that Singaporeans love tiny apartments because of the lower quantum which makes them more affordable. Furthermore, as a property investor, the leveraged return is quite hard to beat.

In exchange, property buyers take on the burden of a 25-30 year mortgage and the risk that property prices may drop. Also, if their only investment asset is that single piece of property, I shudder to think of what might happen if there are asset-specific risks. Most people aren’t engineers or property managers so there’s no telling what kind of issues that particular property could have in the long-run. Property investors take on the added risk and expenses related to rental of the property. On top of all this, property buyers forgo what is essentially a risk-free yield of (currently) 2.5-3.5%.**

Oh yes, there is also the additional risk of not being able to service the mortgage in the event the property price is near the maximum the bank was allowed to loan you.

By now, you probably can tell that I’m not so big a fan of property as an asset class but given how most Singaporeans don’t see or understand other alternatives, I’m not surprised at how popular tiny apartments are with Singaporean buyers.

Notes:

*CPF is a pension scheme that every working Singaporean is enrolled in.

**Most people pay for their mortgages from their CPF OA account so I’m factoring in the extra 1% that CPF pays on balances up to $60,000.

Returns data for various portfolio compositions

If you’re wondering about asset allocation strategies, consider reading the following post that was put out some time ago by Financial Samurai.*

It’s a good understanding of the risk/reward trade-offs from being more overweight in bonds or stocks. Of course, if your investment horizon is long, you should consider being overweight in equities.

Also, the thing to notice is how little difference in drawdown there is between a 80/20 portfolio and 90/10 portfolio. I suspect the real practical difference comes down to how much psychological pain one can bear.

Other things I would add are:

• Many financial commentators always comment about how the maximum drawdown in a year could be something like 40-50%. i.e. Being 100% invested in equities means having to endure seeing your wealth drop in half. They often fail to highlight that the rebound following bear markets is often significant as well.
• If you could extend your investing time horizon, you inevitably could be overweight equities. Being in bonds or cash would pretty much just be for peace of mind and/or liquidity reasons.

 

Notes:

*Data compiled by Vanguard is for US markets but I suspect that we would see similar returns for the STI.

The downside of upside

I’ve mentioned a few times about how a senior colleague of mine has been waiting on the sidelines for almost two whole years. He’s been almost 100% in cash or some fixed-income investments that pay little to nothing, and had to experience the pain of missing out on last year’s run-up in the market. He’s also missed on the additional yield provided by equities.

I’ve also moved more from equities to cash/bonds but that’s largely a function of how markets have run up and I’m definitely nowhere near 100% in cash. As my time horizon is VERY long, I suspect my average allocation will be 80/20 cash/bonds with room to move to 100/0 or 70/30 at market extremes.

Kyith over at Investment Moats has a fantastic post on how being too cautious has costs too.* Of course, one does what one needs to do to sleep well but the costs of trying to time the market can be costly and investors will do well to recognise this cost.

 

Notes:

*In Econ 101, this is what we call opportunity cost.

Market cycles matter

I know I run the risk of being wrong but for what it’s worth, this is my honest opinion. After all, it’s very difficult to spot bubbles except in hindsight.

Recently, I’ve been talking a lot of shit about cyrptocurrencies and I think many people have mistaken my comments about cryptos as a sign that I think they are a total scam.*

I don’t. In fact, with my cursory understanding of the technology, I think they the Blockchain technology that all cryptos are based on could fundamentally change the way some business is done. There seems to be a lot of promise in reducing the fees that many financial intermediaries earn or ensuring the integrity of the supply chain of a product.

The problem I had with cryptos is the fact that almost everyone seemed to be buying into the hype. In fact, my boss asked an innocent question, “Why was there suddenly so much attention on bitcoin when the thing itself is almost 10 years old?”

I thought the answer was simple.

The only reason why 2017 was the year of bitcoin and cryptos was that there was so much money that was made (whether the money was real or illusional is another matter altogether).

That fact in itself made the intended use of cryptos irrelevant. All that was relevant (and still is for some people) was whether the price of cryptos was going to go up or down. Now, that is something interesting to me because it is the same with any other investment. If there are too many people chasing after the same returns, they are going to bid the price up and sooner or later, no one is going to believe that the price will keep going up and that will be the beginning of the end for the inflation in prices.

The people that believe that it could be otherwise just haven’t read enough.

It was the same for financial assets and real estate (‘08/09), internet start-ups (00s), Asian real estate and stocks (‘97), Nifty Fifty stocks (60s), equities (1929), the South Sea Company, tulips and so on and on.

Stage one: nascency

People who invest in anything, in general, need to be more aware of the fact that ALL markets move in cycles. In general, any cycle starts with a small segment of investors in some new or previously unloved asset class. These investors get called all sorts of names- whackos, gamblers, speculators or what-have-you.

Stage two: some people make decent money

Eventually, these guys start making some money and people start to take notice. As more people chase after the same returns that these guys have gotten, the initial group of investors starts to make outsized returns. It doesn’t help that this initial group seem like average Joes and Janes to their neighbours. People start to think that if these people can make 1000% returns, I can too.

Stage three: envy draws everyone

Investors in other asset classes, which have returned nowhere close to the returns from this asset class, then wonder what the hell they’ve been doing, getting tiny returns while these people that they thought were whackos are proving them wrong. It doesn’t help that some “whackos” make all this money that is many multiples of what their full-time job pays in a year. Some of the investors start becoming converts.

Eventually, many people who have no business investing in anything start putting in tiny bets into this new asset class. The bets pay off. They then put their entire nest egg into this ‘sure thing’.

Stage four: beginning of the end

Then, without warning, prices start to collapse.

Entire nest-eggs and paper fortunes worth several lifetimes evaporate. Those with gains start selling furiously, desperate to hold on to whatever gains that they have. This compounds the selling. The die-hards are telling everyone else that this is just a dip. It’s a chance to buy even more they say. What they forget is that some people have already put all they have into this one thing.

Stage five: back to earth

Prices start to stablise and provide some relief. But as corporate bankruptcies due to losses in this asset start to filter, everyone starts to realise that it’s over. All they can now do is lick their wounds.

While it seems like the easy answer is get it at stage one or two, the unfortunate thing is that there’s no way to predict which asset to get into or when it’s going to take off.

Many other experts on investing have written about bubbles, market euphoria and how to spot these things. My favourite person on the topic is Howard Marks of Oaktree Capital and I understand he has a whole book devoted to market cycles coming out later this year. I’ll be sure to read it.

Revisiting the crypto craze

If you cast your mind back cryptos, very few people were talking about it prior to 2017. Only the people who kind of understood or were willing to explore the technology were invested before 2017. I dare say that prior to 2013, the people in it were mostly the people who were working on the technology itself.

Only after a certain group of people had already made outsized returns on their investments did cryptos start to attract the kind of attention it did in 2017. It probably also helped that 2015 and 2016 weren’t exactly good years for stocks. This made the gains in crypto seem all the more attractive. Everybody from South Korean students to Japanese salarymen started buying bitcoin too, thinking that they’re all bonafide investors now. My boss was also asking if we could do a presentation on the economics of bitcoin.

That’s basically when I knew that cryptos were done. I didn’t know if prices would continue to go up or not but I knew cryptos were now a major bubble.** The point here is not about cryptos per se. The point is that if we look back at the Global Financial Crisis (GFC) in ‘08/09, there was a similar story that played out in US real estate (in ‘04-’06) which led to the financial crisis.

Next time, if someone asks you for money to invest in something, you probably want to ask yourself: “Which part of the cycle are we at right now?”

Notes:

*Funny enough, there’s actually one called Super Cool Awesome Money (SCAM).

**After some colleagues and I discussed how ridiculous the price increases in crypto had been, the price of bitcoin more than doubled over the next three weeks. It goes to show how difficult timing markets can be. Crazy can get crazier. Lord Keynes has been quoted to death on this but it bears repeating: “The market can stay irrational longer than you can stay solvent.”

What’s your plan when the markets drop?

So, equity markets around the world were hit pretty bad on Monday and Tuesday. Even the cryptocurrencies were hit pretty bad*. As I write this, the STI is down about 6.5% from its most recent peak.

However, a colleague of mine who’s been on the sidelines, and totally missed the upward march in the stock market, got really excited. His worry will be that markets don’t go down far enough for him to get completely in.

I’m not out of the markets because I believe timing it is a futile exercise but I moved more money to cash/bonds as valuations got higher. In fact, I stopped buying anything after Feb last year.

Key point now is: What would you do if the markets really present a buying opportunity?

For me, the plan would be something like this:

1. Split the money you have to invest** into 10 portions.
2. When the market goes down 10%, invest 1 portion into whatever’s on your watchlist. To keep things simple, I’ll assume it’s the STI ETF.***
3. If it goes down another 10% (relative the peak), invest 2 portions.
4. If it goes down another 10% (relative to the peak), invest 3 portions.
5. If it goes down another 10% (relative to the peak), invest 4 portions. By this time, that sum of money you had will be fully invested.

You could swap the 10% down criteria for months. i.e. Wait 2-3 months instead of seeing whether it goes down 10%. Either way, I don’t think you’ll do very badly in the long run by following such a plan.

My main point is: You need a plan to get through a fall in the markets. Some people panic or they don’t have deep pockets and are forced to sell. This is the kind of opportunity for long-term investors to get in and have their money compound at 10% per year. If you get in when markets are expensive, it’s pretty likely you’ll end up compounding at a rate lower than the average rates.****

Plus, most bear markets don’t go down more than 50%. The times that it did, the run-up in valuations were much more extreme. Even the S&P 500’s CAPE ratio is half that of the dot-com bubble. This time, you don’t hear stories of the financial system being over-leveraged or major players being over-extended. For Singapore, you could even argue that markets were not richly valued by a long shot before Monday. Personally, my money is on a correction or a bear that is extremely short-lived.

Notes:

*My joke is that cryptos fell because some colleagues and I had to give a presentation to other colleagues. When you have civil servants interested in something, you know it’s time is up.

**This sum should be something you don’t have any urgent need for. You shouldn’t be using money that you need to use to pay the bills or something that you’ll need in the foreseeable future. If you struggle to pay the bills, you shouldn’t even be investing. Get your spending in order first.

***For most people, stock picking isn’t something they should be doing anyway.

****If average rates of return for the STI are 8% a year (which they have been), then buying at low valuations should help you compound above that rate (e.g. 10-12% p.a.) while buying at high valuations will cause you to compound at a rate much lower (e.g. 4-6% p.a.).

STI PE10: 1 Feb 2018

STI Close: 3,529.82
PE10: 14.38x

The run-up in the STI has really caused valuations to jump quite a bit. With the PE10 at 14.38x, the earnings yield is now below 7%. Furthermore, a spike in the 10-yr bond means that difference in yield between the PE10 and 10-yr Singapore Bond has fallen significantly below 5% for the first time since August 2015.

Given the pullback in US and EU markets on Friday, I suspect we’ll see a much weaker STI on Monday. Anyway, at this level, things aren’t looking attractive. I’ll consider loading up on more equities if the STI goes down to 3,200 or less.

Meanwhile, sit tight and hang on for the ride!

Growing wealthy is a habit

In a world filled with psychological biases, there is none more apparent than the “halo effect”. The “halo effect” is when someone is viewed as some Omni-prescient being due to his or her status.

This status may be due to positional goods (a.k.a Veblen goods) that signal one’s position or it could be due a status conferred by an authority. In the first case, a good example would be the conclusions people jump to based on the kind of car you drive; a person driving a Mercedes Benz or BMW is usually seen as someone with money. In the second, doctors or people who have some title (e.g. CFA, CPA, etc.) to their name as seen as authorities of some sort.

With the ‘halo effect’, the assumptions and presumptions are sometimes taken too far. For example, it would reasonable to assume that a doctor is knowledgeable about medicine and health but with the ‘halo effect’, sometimes people expect doctors to be knowledgeable about everything.  

Unfortunately, this halo effect is often present when it comes to getting wealthy. Many people assume that getting wealthy and being free from worry about finances is only something those with high-paying jobs or those who are really intelligent* can achieve.

See if you fall prey to the ‘halo effect by considering the following two people.

Person 1

Gas station attendant and later on in life, janitor.  His idea of a treat was his usual morning visit to his local coffee place. He always wore shabby looking clothing that even gave the impression that he was homeless.

Person 2

A-list actor. Earned millions from blockbuster movies screened in theatres around the world.

Who would win?

At first glance, the obvious answer seems to be Person 2. After all, if you earned millions in your lifetime, you’ve possibly earned more than most people even earn in their lifetimes. With that kind of a headstart, how can you possibly do worse than Person 1 who probably earns a wage than probably falls into the bottom 10% of any society?

Unfortunately, that’s true.

Person 1 accurately describes Ronald Read who left a US$8 million dollar fortune to charities and other institutions. And he isn’t an isolated example. Take the case of Margaret Dickson who left a US$1.42 million dollar fortune and Paul Navone who had a fortune large enough for him to donate US$2 million to charity. (full story here). In Singapore, there was a case of a retired primary school principal who left $1 million to her domestic helper (story here).

Neither of these people profiled had jobs that paid astronomical sums. In fact, Ronald Read, Magaret Dickson, and Paul Navone all had low-paying jobs while the Singaporean profile had a job that was considered upper-middle class but certainly nowhere near investment banking levels.

Whereas I got Person 2’s profile from something I read about Nicholas Cage (who had to declare bankruptcy) but that profile isn’t something out of the ordinary. I remember reading similar things about Johnny Depp and stories of lottery winners who subsequently lost it all also come to mind.

Sure-fire way to wealth

I read this the other day and I completely agree. You may not be the best investor out there who can consistently generate the highest returns year after year, but being disciplined about savings and being humble about potential returns will ensure that you get there.

The main reason why people in the Person 1 profile succeed despite the seemingly low odds is that they turbo-charge their returns with a high savings rate and let their returns compound. i.e. They put their head down, work hard, lead a simple life, and let time do the heavy lifting for them.

The main reason why people in the Person 2 profile do so badly despite the odds being in their favour is that they let lifestyle creep** take over and make terrible financial decisions. It’s the same with every company that earns too much cash and then blows it on silly projects that kill shareholders’ returns rather than add to them.

As the people in the first profile show, there is a way to wealth.

You just have to stick with the plan.

Conclusion

Before we go, I’m not saying that you shouldn’t study hard, or work hard to get a job that pays well. I’m saying that getting a high-paying job isn’t a necessary condition in order to get wealthy. Neither is a high intelligence.

Obviously, better-paid people who are disciplined savers and investors end up wealthy at a younger age and find it much easier to do so. Celebrities who are smart with their finances can parlay their sums into even greater sums (Oprah and Dolly Parton for good examples of this).

The point I wanted to make is that we need to strip the halo effect away and realise that most people could become wealthy if they wanted to. Being disciplined and smart about your finances matter more than high pay and intelligence.

 

Notes:

*I used the word ‘intelligent’ and not ‘smart’ because ‘intelligence’ usually refers to one’s innate cognitive ability and is largely immutable whereas ‘smart’ usually refers to one’s learned experiences. Even if you disagree, that’s the way I mean it here.

**Lifestyle creep is something that many people can relate to especially in this era of social media. Seeing other people dine at fancy restaurants or take holidays to exotic locations stir emotions that have people convinced that they too, need to experience the same things in order to be happy. People then spend extra dollars earned on nicer but unnecessary things. It’s particularly common among younger people who see 100 dollar t-shirts or 1000 dollar shoes as a necessity in order to gain influence among peers. It’s stupid but I know the feeling well because hey, I was once young too.

Stock markets in 1997 and parallels with today

I chanced upon this clip the other day while listening to Ben Carlson’s and Michael Batnick’s excellent podcast. If you haven’t been in the markets for more than 10-15 years, you should watch it. If you have, you should watch it anyway.

The clip is about 30mins long and is a good look at what the psychology in the markets are like during a boom. These were times when most new investors (in their 20s) were barely born or those who have limted investing experience (like myself) were still in the early days of our schooling life.

Amazingly, there were quite a few people interviewed who called it fervour and so many of the new participants in the stock market were people who had never touched the markets before (there was a cop, owners of a carpet business) and these people were doing incredibly stupid things (day-trading, buying stocks without even knowing the name of the company or what it does, buying on rumours etc.). Problem is, they made money doing these stupid things. And as anybody will tell you. If you get rewarded doing stupid things, you keep doing more of it.

The problem, as pointed out in the episode (#9, in case you’re curious) is that all the people who called it were basically early. I don’t know the exact date that the show was broadcast or when the people were interviewed for the show but let’s assume that the show was broadcast in mid-1997, that would still have made all the experts in the show who were calling it a bubble early by about 2.5 years.

The amazing thing, as I watched the clip, is how many parallels I could see with 1997 and markets in 2007 and markets today. While the S&P 500 and Dow has been climbing new heights many times over this year, I don’t think there’s a bubble in equities. Stocks aren’t cheap but how many people who have never touched the stock market in their life are coming to the party? Not many. Many people are still scarred by the Global Financial Crisis of ’08/09.

So where is the bubble? The obvious answer for me is in the startup scene and the cryptocurrencies.

The startup scene

Startups or Venture Capital is a brutal game where the odds of finding a success story is probably 1 in 20 or worse. Yet, SoftBank’s Masayoshi Son managed to raise a $100b Venture Capital fund.

Even the ones that ‘succeed’ are still burning through investors’ monies at an incredible rate. Take Uber for example. As recent as Aug 2017, Uber was estimated to be burning through cash at a rate of $2b a year. If Uber’s business model is anything like Grab’s, I’m not sure how they are going to ever make money. Grab’s model is basically predicated on subsidising both the consumer and drivers in order to grab (pun intended) market share.

So, if all these ride-sharing/hailing companies aren’t making money right now? What happens when investors get sick of throwing good money after bad? For one, those companies have to start monetising their customers. Maybe they raise money through selling ads on their cars? Or they raise prices of the rides and reduce the incentives given to drivers? The question is how much profit will they have even after doing all that? Will that be enough to give a significant rate of return to investors?

Cryptocurrencies

I cannot even tell you how ridiculous this one is. The bubble in crypto is painfully obvious for anyone who has studied markets.

• Buyers who don’t even know what they’re buying? Check.
• Unregulated asset class? Check.
• Totally unrelated businesses trying to ride the crypto wave? Check.
• Institutional investors coming late to the party? Check.

It’s painful to see how some people who are only about 20 years old think that they are going to become multi-millionaires in just a few weeks when they’ve never had more than a few thousand dollars just a few months ago. I guess this is what older investors mean when they say that there are no old and brave men on Wall Street. The markets are where brave men die young and cautious people live longer.

What to do about all this?

The best thing to do about all this is to stick with the strategy that you already have. As an investor, it’s not easy to find bargains in the market as it was a year ago when things were murkier and when almost everyone thought that things were going to get worse.

I don’t know if the bubbles pointed out above will pop soon or they will go on for some more. All I know is that I’m staying away from those places.

How many lives will the bitcoin mania actually change for the better?

So bitcoin has blasted off to more than 15,000 USD. At one point it almost hit 20,000 USD but quickly fell back to around 16,000 USD where it stands today. The ride so far has been really volatile; Major papers were talking about bitcoin as a mania when the prices were around 7,500 USD and then prices took off even more from there.

The question I have is: how many people will actually become permanently more well off due to the rise in bitcoin prices? Given fact that only about 1,000 people own 40% of all bitcoin so far (source here), that seems like a paltry number of the total people who have bought some bitcoin.

So here’s what I think.

Many people bought too few bitcoins

A core group of bitcoin buyers who were early probably bought too little too early. So even if they were in the game as an investor (I’m leaving out the miners for now), they probably saw this as nothing more than a novelty and probably have nothing more than $10,000 invested. Some may even only have a few hundred and the majority probably have a few thousand invested. This is true especially for younger people who don’t have much moolah, to begin with.

So let’s take the middle and saw that most of them have $5,000 in bitcoin and that they got in somewhere at the beginning of the year. To make things easy, let’s say that they bought it at a $1,000 per bitcoin. As it stands, these people have turned their $5,000 into $75,000. That’s a great return and no small sum but in the great scheme of life, that’s not life-changing. Even $10,000 turning into $150,000 is fantastic but once again, that’s not the kind of money one retires on. That kind of money is just a nice bonus for the year which people will probably spend on holidays, a nice meal, or a new toy (e.g. car, yacht etc.)*

How many cashed out along the way?

And the above is assuming no one cashed out along the way. Someone who bought at $1,000 would have been extremely tempted to cash out way before the prices hit $15,000. We see this is stock markets all the time where people buy a stock at 10 and cash out way before the stock even hits 20. So I’m willing to bet that a good majority of people who bought at $1,000 might have even cashed out at $2,000 or $3,000.

They would have then experienced serious sellers’ regret as they price continued to climb and maybe they would have got in again at $5,000. Thing is, they probably got out again at $7,000 or $8,000. Want to guess what price they recently got in again at?

The point is, guessing how much returns someone made by comparing prices now and at the beginning of the year is quite futile as most buyers probably never hung on long enough to enjoy the full run-up. And for all you know, they ploughed ever greater sums at much higher prices based on the early success of their trade.

How many are ready to handle their new found wealth?

Even for those who were in bitcoin from the early days and have held on until know, how many of them are now facing the agonising decision of whether to continue holding the coin or divesting?

You have to remember that the swings in bitcoin prices will make some people very nervous. Imagine having 10,000 bitcoins and seeing your wealth change by $30,000,000 in a matter of hours when the price of bitcoin increased to 19,000 USD and then fell to close at 16,000 USD.

And how many of these newly made multi-millionaires are ready to deal with this amount of money? We have to remember that there have been many others like them in the form of lottery winners, NFL players and NBA stars who suddenly came into wealth and then saw they wealth all evaporate in just a few months or years.

Tough choices to make

Many people in the investing community are looking really dumb right now for saying that bitcoin is a bubble and that it’ll burst or that the price cannot go any higher (I actually think it can) but that’s always the case before the bubble has burst.

But if you’re holding on to bitcoin, you have tough choices to make:

• Do I cash out now and gain some utility from spending my gains?
• Do I hold? Just in case bitcoin prices go up further?
• Should I go back in/ go in now in case I miss the boat?

I wouldn’t want to be in bitcoin given the current environment.

Notes:

*Which is good for businesses.

Recent thoughts on the SG property market

In case you haven’t been following the news, the property market in Singapore has come back to life (kind of) with quite a number of en-bloc deals. MAS (Singapore’s central bank) also had to come out and caution that there was a little ‘exuberance’ in the market. MAS also noted that prices have transaction volumes have picked up while interest rates have remained low.

The commonly used reference rate for housing loans stood at 1.1 per cent in mid- November, compared to a peak of 3.6 per cent recorded in 2006.

However, vacancies in the rental market have remained high. According to the article, MAS noted that there are some 30,000 vacant rental properties in the market. Redevelopment of the land sold through en-bloc deals, together with existing private property developments, could add another 20,000 units to the market (of course, not all would at to the rental market).

What bothers me is that interest rates seem historically low and we seem to be at the start of a rate hike cycle.* Almost every property buyer in Singapore buys their property with a long-tenured loan (think 25 to 30 years) and if you’ve just begun to start servicing the loan, you have to be prepared for the fact that interest rates may be on their way up and drive the lifetime interest rate on your property loan to a level more like 3-5% over the lifetime of the loan.

I’m not an expert in real estate but I’ve heard stories and I have three stories that point towards what’s going on in the property market. Namely, those problems are (1) property owners not expecting a drastic rate hike, (2) vacancy rates are high but understandably so because buyers paid a high price and therefore demand steep rents, and (3) prices are (still) high despite the recent rosy outlook.

Anecdotal Evidence #1: Not many people are expecting rates to go up drastically

I’m not sure how many people are prepared for that. Anecdotally, I’ve had a friend question if rates could even get that high and I was about to slap my forehead because this friend works in a bank. How could he not know what interest rates have historically been like? The interest rate on loans have typically been much higher than they are now and we’re at the zero-bound so unless you believe the world is about to go the way of Japan, you need to prepare for the fact that interest rates will most probably go up.**

Anecdotal Evidence #2: Plenty of vacancies in projects that didn’t make sense

On the other hand, there are some property buyers who seem stuck with a horrible investment. I heard from my boss (he’s an avid follower of the property market) over lunch that some investors in a certain property have problems finding tenants. The property sits atop an MRT station (one of the last stops though so it’s at least 30mins by train to town) and is one of those shoebox apartments (1 bedroom apartment) where the price paid per square foot is ultra high (~S$1700 psf) but the actual cost of the apartment is “low” (~ S$600,000 -700,000).

A glance at listings online shows that owners are asking for close to S$2,000 per month to rent a one-bedder. And I see plenty of listings for the project which means that unless someone’s listed his unit many times over or the same unit had to be listed again week after week, there are many apartments there begging for tenants.*** Whoever has a unit there better be happy letting it stay vacant or I can’t see why someone would choose to pay almost S$2,000 per month to stay in what is effectively a hotel room when you could rent a room in an HDB flat (of course you have to share with some flatmates) in a better location for one-third the price. You have to remember that someone who can afford to pay S$2,000 per month in rent must be making at least S$8,000 per month. Most Singaporeans don’t make that much (median salary is more like S$4,700) which leaves you with foreigners. Foreigners making that much have to be at least on some sort of expat package which means that they come with families and won’t be looking at one-bedders, what more in such a far-flung location.

If there is one property like this, there are more. And my guess is that owners aren’t too bothered by the lack of tenants as long as they have the ability to service the loan. Their ability to service the loan is currently helped by historically low interest rates.

Anecdotal Evidence #3: Property prices are still high (sorta)

The third story comes from a friend of mine. Recently, he bought an Executive Condominium (EC)**** located just across the street from my flat. What this means is that our location is basically the same as far as valuation is concerned. However, the price he paid is almost 3x what I paid for my flat for an apartment of a size about 90% of my flat.

When both our apartments hit the resale market (say in 10 years) which is subject to the forces of demand and supply, I’m not sure if he will see any further upside to the price he paid for his unit. Why? Imagine a potential buyer for his unit surveying the area. The buyer will easily find that 5-room flats (~ 1200 square feet) in the same neighbourhood can be bought for around S$500,000 (assuming prices of HDB flats in this area remain as they are now). If my friend is looking to sell his place for S$1 million, the buyer will have to seriously wonder if it’s worth paying double the price of a 5-room flat in a similar location for a slightly smaller unit that comes with amenities such as a swimming pool and security post.

The only other way to justify the selling price of the S$1 million EC is to assume that the prices of HDB flats in this area will jump so much that the premium for an EC shrinks to maybe 20-30%. Based on that analysis, the upside for buyers of EC at that price is quite limited while the buyers of BTO flats like mine are much more optimistic. On the other hand, the downside is quite limited for flat owners as opposed to EC buyers.

I know my friend didn’t buy the property as an investment (i.e. to make money) but it still points towards the fact that property prices in Singapore remain elevated and we haven’t seen a fall in demand like the likes of post-’97 or ’08-’09. As with any asset class, the usual adage is well-bought is well-sold.

 

Notes:

*I’m not an inflationista. Rather, the fed has already begun the hike so it’s not like I’m being a Cassandra.

**I read that someone at the fed did a study showing how Amazon is a factor keeping prices low and I guess if this remains so, then interest rates may not need to be hiked.

***The truth is probably someone in between. Some agent listed the property many times and had to list it multiple times over the weeks. But still not a good sign, no?

****ECs are this weird scheme where the governments allow private developers to bid for land in their landbank to build a condominium development that is sold more along the lines of public housing. After 10 years, the development becomes private and is not subject to the rules that govern public housing. In essence, Singaporeans and PRs get to buy a condo for a discounted price.