Shoebox Unit Buyers and Developers Going to Get Screwed?

edit: I used the words “Mickey Mouse” and shoebox interchangeably.

 

A good friend brought to my attention this commentary about URA’s latest move to restrict the size of units in new private housing developments outside the Central Area.

Reading the commentary and the news when the restrictions were first launched, it appears that the main beef URA had with these “Mickey Mouse” apartments was that the proliferation of these apartments in certain areas would increase the population density and hence increase the strain on public infrastructures such as roads, MRT lines, and buses.

The commentary piece also seems to feature the downsides of shoebox units quite heavily:

• Rental yields under pressure
• Stagnant to falling prices for such units
• Buyers who would easily have turned to a resale HDB if they had a choice
• Sneaky developers who use such units to elevate the PSF of the project

 

What does the future hold for such shoebox unit owners?

In the light of rising interest rates, I would say that these guys are screwed. However, it bears noting that “these guys” are probably a small subset of the market. After all, who on earth thought that it would be a good idea to buy a Mickey Mouse-sized apartment in the heartlands to stay or as an investment?

Location is a big factor in property investment. Areas like Tanah Merah or Woodlands are one of the cheapest places to stay in Singapore. You can easily tell which areas are more prized thanks to the difference in HDB resale prices by area.

The next thing after location would be size. I think it would be quite universal to say that when it comes to living space, “more is better”. Of course, that reasoning can only be taken to a certain extent but shoebox units are starting from the other extreme. Try convincing people with one or two children to live a minimalist lifestyle.

While the article also mentions how some owners are optimistic that there will be less supply of shoebox units and hence it’ll raise the value of the units, my bet is that the rising interest rate environment forces more units onto the market and adds the existing supply of shoebox units.

 

Salvation for shoebox unit owners

The only salvation I can think of for shoebox unit owners in the heartlands would be an increase in the number of tenants.

These tenants could come from the longer-term stay because they’re here for work and on tighter budgets. This assumes, of course, that there are so many of them that they already drive rentals in the HDB market up to the point that shoeboxes become attractive.

The other group of tenants would be from short-term stay like Airbnb but oops, that market is also heavily restricted right now. Meanwhile, the property market is expected to continue to add more than 10,000 new private residential units every year (except for 2020) up until 2021 and vacancy rates are creeping up.

 

Conclusion

I’m pretty sure that with URA’s latest move, it’s signalled to the market that shoebox unit owners are screwed. Note that the restriction wasn’t a major move — it just inched the size development guidelines up by a bit and confined that restriction to projects outside the Central Area, but in that one move, it’s shifted the limelight to shoebox units and what the downsides of owning one are like.

I’m pretty sure that shoebox unit owners who can’t hold on to their property amid rising supply and vacancies are going to feel quite bad. If the shoebox unit is just a part of their investment portfolio, they’ll be fine. If it’s the ONLY part, they are going to feel quite a bit of pain.

The Opportunity Cost of Spending Too Much on Housing

Is your housing expenditure detriment to your retirement?

 

Alternatively, this could have been titled, “An Ode to my CPF”.

I know I’ve given lots of shit to CPF (for example, “CPF monies: to depend on it for retirement is a pipe-dream“, the footnote in “Early retirement: some math“, or more recently, “What’s the economic logic behind CPF’s accrued interest policy?“) but think about it:

What if you had regular contributions to your CPF and you let it compound?

There is a group of people in Singapore that has spent so much on housing that they have barely any contributions to their CPF each month. Those that even have to fork cash out of their pockets to pay the mortgage are in truly dire straits. If you happen to find yourself in this situation, read on below.

A Very Personal Example

I happen to belong to the camp that has regular CPF contributions because my housing loan is so low that my monthly CPF contributions more than covers the monthly mortgage. Also, I will finish paying off my loan in another 4 years or so (background here).

So I decided to run the numbers on the following scenarios to see how much I would have when I turn 55 (the age that we can finally take some of the money out of our CPF accounts):

A: If I work for another 20 years
B: If I work for another 10 years
C: If I work for another 5 years

The assumptions I’ve made are as follows:

#1: Current contributions increase by $10,000 per year after our housing loan is paid off.

#2: Contributions remain constant over time. i.e. No increases in salary.

This is for easy math and anyway, I don’t expect my salary to increase drastically beyond the inflation rate so the contributions can be viewed in ‘real’ terms.

#3: CPF returns 3% across all accounts.

I’m assuming this despite having more monies in my Special Account (SA) at this point in time. I know the SA earns a higher rate of interest and combined sums (subject to a cap of $60,000) in your accounts earn an extra 1% but once again, this is for easy math and to set a floor.

#4: I’m starting with roughly $130,000 in both my OA and SA.

Numbers

Thanks to the magic of Excel:

Scenario        Final Amt at 55 ($)

    A                  $1,180,000

B                  $772,000

C                  $495,000

Final Thoughts

Obviously, the numbers above are not going to be representative of what another Singaporean might end up with. I’m making above the median salary although NOT much more than the Median Household Income. Of course, a major factor is that my wife also works and our household size is smaller than the average*.

I still believe that the CPF system needs a revamp. Way too many people are spending what should be their retirement savings on a property, either as an investment (which is still somewhat excusable) or on housing (gasp!). That’s probably one of the main reasons why only about half of CPF members can meet the retirement sum despite pledging their property.**

Also, one big sore point for many people is the Retirement Sum*** going up. There’s a good article on what the retirement sum may be like for younger people today when they reach 55 later on. Just eyeballing the table, it seems that based on my calculations above, meeting the retirement sum shouldn’t be a problem.

Very often, people forget that compounding needs time to work its magic but for compounding to work, there’s needs to be something to compound in the first place. If you spending all your money on housing, there won’t be anything left to compound. And if you want to turbo-charge compounding then you need both time and regular contributions.

 

Notes:

*I believe the average household size is 2.1 in Singapore. No, us having a cat doesn’t count.

**There are also other factors at play. I suspect that the labour force participation rate should explain quite a bit. Some (especially mothers) may have only worked very few years of their lives and hence have little in their CPF accounts. For example, my own mother practically stopped working full-time after she had me and my brother. By the time my youngest brother came along, she had already stopped working for some years.

***The Retirement Sum is the minimum you need to have in your CPF accounts so that the CPF can slow-drip the money back to you in old age so that you have enough money to meet your basic spending needs.

Are HDB flat owners really owners or are they just tenants?

 

I’m glad someone’s finally come out to put a stop to the nonsense that’s been going around on the internet. The hoo-ha started when property analyst Ku Swee Yong wrote an opinion piece in the ST which prompted a reply in the ST forum pages.

Basically, the debate was whether calling HDB flat owners “owners” accurate or whether it was more accurate to call them “tenants” since the leasehold term for an HDB flat lasts for only 99 years, after which, the flat automatically goes back to the government.

The forum writer’s reply was that calling HDB flat owners “tenants” is not good for national defense for psychological reasons.

The Big Question

So what’s the truth?

HDB owners vs tenants: unpacking the great illusion

[…]

So am I an owner or a tenant?

Both. What you own is a tenancy. Clearly, if you have a flat on a 99-year lease, you are a tenant (as opposed to a lodger) because you have exclusive possession of the flat. However, it is also clear that you are not an owner because your right to use the property exists for a fixed term – you will have to surrender your lease at some point.

So it is clear – you do not own the flat, but that does not mean you are not an owner of anything. What you do own is the tenancy. This is because a tenancy an asset that can be bought and sold and your freedom to deal with your tenancy fits with the idea of ownership described above.

[…]

The article that I’ve referred to makes a good case that HDB flat owners are still owners. It’s just that they do not own the flat itself but that they own the lease. After all, this is the effectively the same as owning a private property that has a land lease of 99 years.

Those that say that HDB flat owners are mere tenants forget that if you rent a place, you can’t profit from the sale of the place. Unfortunately, this is what HDB flat owners can do which automatically contradicts the fact that HDB flat owners are mere rentiers.

The Better Way to Think About HDB flats

Property, just like any other asset class, depends on a market of willing buyers and sellers to establish a price for the asset. A 99-year old piece of property ultimately has a quicker pace of depreciation built into it.

You may buy the official line about how HDB flats are a good store of value but that will ultimately depend on the generosity of the sole buyer of that asset at the end of its 99-year life.

Alternatively, you may treat it as a gamble on having the HDB flat be selected for SERS (Selective En-Bloc Redevelopment Scheme) and you get a new property in a similar location which would be worth a lot more than what you paid for the older property.

At the same time, remember that if you stay in your HDB flat, you don’t have to deal with the hassle of renting a place. The downside is that you have to pay for property taxes and conservancy fees.

PM Lee’s NDP Rally Message doesn’t change things

I wrote the previous two sections before Sunday’s (19 Aug 2018) National Day Parade Rally and it didn’t occur to me that he was going to touch on housing in such a big way during the rally.

PM Lee announced quite a few things that will impact housing in Singapore, particularly in the HDB market. I don’t think it changes much of what I’ve said above and the announcements were mainly to assuage the general public that their biggest asset would still retain its value. Notice that he didn’t say that HDB flats will be your goldmine, just that the flats should retain its value.

To be honest, it doesn’t change the dynamics much and you have to remember that the first generation of HDB owners have seen great capital gains for their flats only because Singapore’s economy has grown at an outstanding pace over the last 50 or so years. As the economy has grown, naturally the cost of living and the assets that provide these services must get more valuable.

I think the first generation of flat owners is going to benefit from HDB price appreciation. But what about the second and third generation? We have to remember that Singapore’s resident population is barely growing and much of the growth is due to new residents and permanent residents as our birth rate is below replacement levels.

For newer HDB flats to retain value when they get older, the housing supply will have to decrease or the resident population has to increase.  Perhaps, at some point, HDB will not build new flats in place of older ones.

Parting Thoughts

By the way, private property owners better hope that HDB flats retain their value. Otherwise, the private property markets will be hit as well. The markets, while distinct, are more related than people think.

After all, an apartment and a flat are ultimately just a place to stay. A fair number of private property buyers also come from HDB flat owners who have sold off their flats and wish to upgrade to a condominium apartment. If one type of property gets much cheaper relative to the other, prices will have to correct to narrow the gap between the two.

In summary, don’t forget that housing is an expense whether you own or rent the place. And if you’re into a property as an investment, don’t forget that you’re in it for the leverage and not the yield.

Thinking about Net Worth

For some reason, if you go over to thefinance.sg, you’ll see a collection of posts from many Singaporean bloggers on their net worth. I find it kind of amusing that so many people would want to publish their net worth so openly. I guess it’s inspirational for others who may be around a similar age group but it’s probably also #humblebrag.

My point today is not so much about a person’s net worth in Singapore but how it’s calculated. On the site, I’ve seen a few people in their late 20s or 30s with a self-reported net worth or portfolio of investments in the 600K-700K range. It’s not that the numbers are impossible but it’s just that I find it quite rare to have so many people report similar numbers.

That’s when I realised that many people have different ways of calculating their Net Worth. Some only include their excess cash and investments (stocks, property etc.) while some include money in their CPF accounts, and some even include the share of their home equity (i.e. the value of their primary residence minus outstanding mortgage).

In my opinion, there are only two approaches we should be using and I’ll go through each of them and what they mean.

Approach #1: Comprehensive a.k.a What the Government does

How the government measures household net worth. Source: Singapore Department of Statistics

From the table above, you can clearly see that the government’s version includes everything one owns minus everything one owes. This includes all forms of property, be it your primary residence or your CPF monies.

I call this the “comprehensive approach” as it measures all your assets net of your liabilities. Some people may argue that CPF monies are highly restrictive in their use and your primary residence should not be included because you actually “consume” housing when you live in it instead of being able to rent it out and gain some rental income.

The counterargument to both those claims is that money is fungible. One could always migrate overseas and the monies in your CPF accounts would be released. The argument for your primary residence is that we cannot confuse cash flow with investment gains. One may not be able to rent out one’s house while staying in it but there is still the chance of capital gain if one chooses to sell the house.

Anyhow, if you choose to use this approach to measure your net worth, this is the most comprehensive approach. MoneySense provides a nice calculator for you to measure this.

Approach #2: Conservative a.k.a What Bankers Do

HNWIs are defined as those having investable assets of US$1million or more, excluding primary residence, collectibles, consumables, and consumer durables

• Capegemini Asia-Pacific Wealth Report 2017, footnote 1

Alternatively, if you aspire to join the ranks of the wealthy, then it makes sense to measure yourself like one. Banks also classify clients by Net Worth but their calculations are slightly different. They use a benchmark called “investible assets” which doesn’t include the place you stay in or other assets that may not be so liquid (i.e. not so easily converted to cash). In this case, I don’t think the monies in your CPF account counts.

Since this approach only counts what can be converted to cash without economic tradeoffs (your primary residence doesn’t count because if you sell your house, you still need to spend some cash finding another place to live in), this is probably the best measure of how wealthy you are.

In other words, this approach actually measures how much you would be able to freely spend on goods and services.

Conclusion

Doing both calculations, I find that the first approach gives me a much higher number than the second approach. This is because a substantial amount of my assets are in my CPF accounts and home equity.

I suspect that most Singaporeans will find themselves in the same shoes as me and if I were the government, I would be really worried about the ratio of approach 2 to approach 1. The more wealth that is tied up in CPF accounts and home equity, the more people may think of moving overseas to unlock the assets that are essentially trapped in their homes and CPF accounts. After all, what’s the point of having so much money that you can’t use because most of it is locked away in the form of a house or in an account that drip feeds you the money?

Best Things I’ve Read All Week: 29 July 2018

Welcome to the end of the week! I’ve been busy working on some personal coding projects which explain the light postings.

 

A $25,000 robot barista serves 120 cups of coffee an hour — and it is part of a growing ‘robot revolution’ that could kill millions of jobs (Business Insider)

Ok, you have to forgive the doomsday-esque headline but automation and robotization is probably what will drive the next industrial revolution. Just like the last one, lots of jobs will be lost and lots of new ones will be created.

If a $25,000 robot can serve 120 cups of coffee in an hour, that investment will easily pay off in something like 6 months? The human reaction will of course be to come up with something that this robot won’t be able to do and charge it for twice or three times the price. The losers will of course be the generic baristas working for minimum wage and producing a standardised product.

This situation is probably applicable across many other industries where there are larger chains who have the financial capability to be the first adopter of such technology.

 

The relationship between financial or real assets is at extremes – It can be exploited (Disciplined Systematic Global Macro Views)

I’m not so sure it can be exploited but it’s worth noting the chart in the post about how the price of financial assets (large-cap stocks and long-term government bonds) are much more expensive today relative to real assets (commodities, real estate, collectibles).

Main takeaway from the post:

Financial assets are at all time highs versus what is considered real assets; commodities, real estates and collectibles. Real assets usually exploded in relative value during periods of inflation and war when more resources are needed or when commodities are scarce relative to money. The flow of money has moved to financial assets especially those that are related to technologies that do not need capital. The flow of excess money to financial assets and their expected future cash flows exceed demand for real assets that do not immediately generate return but have to be transformed for consumption or usage.

I completely agree about how money has been flowing to tech and so Facebook’s massive drop this week shouldn’t have come as a surprise to anyone. Could I have predicted when it would happen? No. But no one should have been surprised that it happened.

 

How a Falling Australian Property Market is Creating Many Negative Equity Property Owners (Investment Moats)

Kyith over at Investment Moats posted his thoughts on an article about the Australian property market. The funny thing is I also read an article (I think it was shared on Facebook) about how regulators in Australia tightened lending and how that has lead to the poorer borrowers being unable to refinance at lower rates as their loan-to-valuation ratios have now dropped.

Basically, poorer borrowers in Australia are finding it difficult to refinance as banks can now only lend them less on the value of their home. Since poorer borrowers would have taken a higher proportion of the home value as a mortgage, they can’t switch banks or mortgages despite the lower rates because of the now lower loan-to-valuation ratio imposed by the government.

If we add the situation described in Kyith’s article, then the Australian housing market is in for some trouble. The funny thing is how this article comes after our own regulators have tightened the reins on the Singapore property market. So much for Singaporeans who believe in the myth that investing in property is a one-way street. Very often, they forget that in the short run, cycles matter and over the long run, property prices increase at the rate of inflation. Furthermore, the cost of maintenance and property taxes mean that investing in property takes some work.

Property investors have to remember that the lure of property as an investment class is in the leverage one can take. Without leverage, it only gives shitty returns.

Best Things I’ve Read: 8 July 2018

The focus has turned to the markets this week. Here are some things to catch up on.

Compounding requires Absorbing Damage so You’re Never Forced to Quit (Investment Moats)

Kyith has a post that I think underscores that in order for compounding to work, it takes time. And throughout that period of time, things can (or should I say, will?) get pretty nasty sometimes.

For me, the interesting bit is that I never knew there was an ishares ETF that tracks the Singapore market. Kyith’s example about how buying this ETF at its inception* during the highs of the Asian Financial Bubble led to paltry returns over the next 21 years is also very illuminating.

In short, if you buy when markets are expensive, you will live to regret it.

 

New cooling measures: The show has just begun (Property Soul)

Vina at Property Soul has come out with her take on the new ABSD measures and what it means for the property market in Singapore. I’m pretty sure many of you may have already read this but FWIW, stay tuned to her site for more in the coming days.

 

Some Considerations For Investing Globally (A Wealth of Common Sense)

Ben Carlson has a great post on the case for investing globally. He’s written it from the perspective of an investor in the U.S. but of course, the same would apply for someone outside of the U.S.

What’s interesting for me is how the S&P 500 and MSCI EAFE (which represents investing in developed global markets) have taken turns to outperform one another.

While the simple case would be to invest equally in both and rebalance periodically, the more enterprising investor could invest in one, and then start switching to the other as valuations become relatively cheaper in the other.

Also, based on the table, might it be suggesting that in the next period, markets outside the U.S.? From a valuations standpoint, it certainly seems possible.

 

Mainland developers are ‘money mills’ that rely on spiralling asset prices (South China Morning Post)

Many people have been warning about credit bubbles in China for some years now. This opinion piece provides a look at the mechanism by which the credit bubble has developed. If this is true, then the stock markets in China may be on to something after all. And if it bursts, then expect HK and SG markets to be badly affected as well.

 

Wealth Is What You Don’t See (Fervent Finance)

Sustaining Wealth is Harder Than Getting Rich (A Wealth of Common Sense)

Finally, on the personal finance front, two different articles which highlight what should be obvious truths.

The first one makes the point that for most people, getting wealthy is a result of cultivating good habits with money — being frugal and thrifty are sufficient components to getting rich.

I personally know a few colleagues who have been mid-level civil servants for a good 30 years and right now, they would easily qualify for the top decile in terms of net worth. Yet, they watch every dollar. To them, the best meals are the ones in the hawker centre or coffee shops. They fly economy because it’s cheaper and they would never stay in a 5-star hotel unless it came at a good price. They are some of the most practical and humble people I know.

The irony is that some of the kids we teach think buying Yeezys or NMDs, which cost hundreds of dollars, and 80-dollar T-shirts show that they are rich. What they don’t realise is that the guy standing before them in the classroom could be worth millions, never have to work another day in his whole life but is wearing a $20 polo tee and sport shoes he copped at a sale.

The second one makes the points that getting rich and staying rich are two different things. You may have gotten rich through a lucky break such as riding the wave of an industry that’s experiencing unprecedented growth or an inheritance. But staying rich takes much more than that.

You can’t spend like a drunken sailor (which is essentially what Johnny Depp did) and expect to remain wealthy. This is why the Chinese have a saying that “Wealth doesn’t last three generations.”

In my life, I’ve seen how some of my extended family behave and everything is playing out according to the pattern above. In my family’s case, it may even be accelerated. The first generation built the wealth through sheer hard work and grit. The second generation has grown it (somewhat) but my generation, the third one, is pretty much spending it away.

 

 

Will you really get rich from your HDB flat? One blogger doesn’t think so.

And I totally agree(d) with her.

In the fifth episode of her podcast, Vina Ip, or better known as the Singapore property investment blogger called ‘Property Soul’, shares her thoughts on why HDB flats should be treated as nothing more than a roof over your head.

Yes, there may have been those who benefited from the asset enhancement strategy that the government had in mind during the 90s but those days may be over. Unfortunately, it seems that many Singaporeans still seem to think of an HDB flat as a stepping stone to private property. This may be true for those who bought BTOs but as I’ve mentioned before, I’m not too sure about those who bought ECs or DBSS units. As for those in the resale market, you’re really stretching it.*

My biggest fear in all this is how most Singaporeans (going by those that I’ve talked to) don’t really have any assets other than their primary residence especially if they’ve bought a piece of property priced near the maximum amount of loan they qualified for. In Singapore, many property buyers are typically stretched on 30-year mortgages. If you’ve spent your entire working life paying for your house, then how on earth will you ever be able to stop working?

Anyway, if you’re into buying property in Singapore, I highly recommend you follow Property Soul’s blog and podcast and go read her book. In my opinion, she’s as good as it gets when it comes to property investment in Singapore. Good advice on investing in property is pretty rare in Singapore. Just like the financial advisory business, there are too many snake-oil salespeople with their own interests at heart.

Notes:

*After all, if you’ve managed to sell your flat for a decent profit, then private property in a similar neighbourhood must command an even greater premium. This means taking on more in terms of a mortgage.

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.

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.

SG property market valuation (updated with SRX Feb ’17 data)

An update on the Singapore property market. For background on this, read here. All data from SRX.

Using the price of HDB flats as the benchmark, we can see that prices for private property in all categories are at a sizable premium to HDB flats. Among the different classes of private property, the premium for private landed remains the highest although the index seems to be on a downward trend. For non-landed, it appears that resale units are at a lower premium than new units.

As for sales of all (new and resale units) non-landed private property, it appears that the area commanding the highest premium to HDB flats are in the RCR (Rest of Central Region).

Of course, prices will vary for individual projects and units but from a macro perspective, it’s going to be much easier to bargain hunt during periods like the early 2000s and ’09-’10 where there was hardly any premium over HDB flats. In fact, times like 1999 would have been a godsend to property investors.

I guess my two main takeaways are (1) despite the Singapore property market supposedly being in a doldrum, private property prices are not cheap right now and (2) HDB flats do keep their value quite well being the cheapest form of housing in Singapore and therefore is a reasonable benchmark for evaluating priciness (or cheapness) of the private property market.