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Saturday, 8 August 2009

Condominiums - Opportunity or Trap

Upgrade or downgrade?

I came across the following article in the 联合早报: 是享受还是受罪. It described someone nearing retirement who 'upgraded' to a condominium of 102 sqm and a new mortgage to pay off, by selling his fully paid up EA flat of 145 sqm. When enquired about his rationale, the simple answer was " no choice, for the comfort, for a better external outlook, will have to suffer a bit".

Selling like hot cakes

I read with both amusement and amazement of the recent craze for condominiums, with new units flying off the shelf like hot cakes. Am I missing something? Are residents here are getting really affluent in the midst of recession or is money raining in corners of Singapore I'm not aware of? While foreign investors could possibly scoop up a substantial number of private properties, residents made up a significant half of recent purchases, as I found out when I went 'sight seeing' in one the recent showflats.

A natural upgrade?

Two independent friends of mine are pressured by their spouses to 'upgrade' to condos as a natural passage of life improvement process. While the financial commitment is substantial (as I will show later), the rationale of their spouses distilled from their conversations summarised as "if so many can afford, why can't I?"

Significant commitment

I worked out a simple table showing the commitment for getting a condo of various sizes under different prices per square foot and interest rates. My assumption is 20% down payment and 80% loan for 30 years.

A few things to note.
  1. Interest rates are often pegged to SIBOR, Singapore Interbank Offered Rates and historically fluctuated between way below 1% to as high as 8%.
  2. If a HDB upgrader intends to buy the condo as a 2nd property (i.e. retaining his/her HDB flat), only funds in excess of the minimum sum in the CPF account can be used for down payments and instalments. Otherwise, the 15% down payment in Cash or CPF and the monthly instalments will have to be paid in Cash.
  3. After a few good years of locking in the mortage loan in low interest rate on purchase, the interest rate will be readjusted thereafter (usually higher). If refinancing at lower interest rate is not possible, the buyer will just have to service higher instalments.
Looking at the table above and my current instalment of about $1,100 for my EA HDB, no way I'll swap the monthly payments for that of a condo of equivalent size.

Benefits: Hedge against inflation?

Despite the higher commitment, I'm often told that land constraints in Singapore will always make property investment a rewarding adventure. I do not have the stats for property prices before 1993, but comparing the inflation rate and property price difference over the same period (very dependent on the choice of period of comparison, so the following is just an illustration):

Singapore Inflation Rate from 1993 to 2008 = 24.3%

Private Property Price Index from 1993 to 2008: = 62.5%!
Thus there IS truth in this 'conventional wisdom'.

Risks: The other side of the coin

I do not doubt the investment quality of property as a inflation hedge (but I still think equities are better investment, see my article on this issue), but one must not ignore the other side of the coin in property investment. If one have ready cash to pay off the mortgage loan any time (but choose to prudently invest the cash else where to take advantage of the good debt), then the risk of using property as inflation beater is tolerable.

But if one is taking the maximum loan of 80% to invest in property, then I do not think its a wise choice at all. Should one or both the spouses takes a dent in income (pay cuts, lost of jobs etc), the financial pressure of paying off the hefty monthly instalment is immense. As one bad thing normally urshur more bad things to come, recession that trigger the income drop normally also meant a drop in property values. In one of the worse case scenario possibe, a couple who hope to 'downgrade' from a condo might not be able to easily dispose the condo at a depressed market, especially when they find themselves in negative equity (outstanding loan greater than value of private property)


I still subscribe to a better conventional wisdom that I know: "Live within your means". An improvement in life do not mean less spare cash to indulge in little things I can enjoy. The last thing I want to experience is trapping myself in a condo because I can no longer afford to drive my car, take my family out for restaurant treats once in a while or have an overseas trip once in a longer while. That thousands of dollars in monthly instalments is enough for a short trip for 2 or 3, and combined a few months of instalments, a long trip overseas for more!

Put it another way, if I can afford the hefty condo instalments, I can afford to go for holidays overseas every month, a life style I hope I can retire to :)

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Anonymous cif5000 said...

Just some comments.

1. If properties are selling like hot cakes, it's better to be the seller (property developers)

2. If the spouse pressurized for a condo upgrade, it's time to get an upgrade, on the spouse that is.

3. Limited does not equal to shortage. The seller or agent always emphasizes that land is limited in Singapore, but the size of Singapore can squeeze 10m people if necessary. And until we see 10m people here, there will be no shortage. In fact, most things on Earth are limited. Air and water are limited, and yet we are breathing freely (at least for now).

8 August 2009 at 23:43  
Blogger Market Uncle said...

Hi cif5000,
Wahaha, I can't agree more. Like the way you put it, short and sweet. You basically put the same message across in 3 simple points!

8 August 2009 at 23:56  
Blogger Khiat Han Hwee Adrian said...

I had discussed on this topic with my clients many times and they are always able to calculate how much they will make. They normally have 3 reasons to buy a Condo...

1) Their first intention is to use the rental income to pay off the mortgage loan. They are able to show me that the approximate rental income is more than enough to pay off the mortgage loan.

2) Their second intention is to sell the house when the market is better. They feel that when the economy improves, there will be more foreigners into Singapore and will push the property prices further.

3) Their third argument is the leveraged factor. They don't need to fork out $1million to buy a $1million property. If they only pay 20% for downpayment and subsequently earns $100,000, he had actually made 50% profit.

Do you have any arguments to counter these claims?

9 August 2009 at 21:33  
Anonymous donmihaihai said...

Hi Adrian,

Try this.

1) Do you really believe the projected returns on all products that you sells?

2) Beside telling your clients to remain invested in equity and bond, you will also say sell when the market is good or higher... Do you know when?

3) Isn't term life has a higher leverage than whole life in term of coverage per $1.

Investment, be it stock or property is not about winning an argument. It is neither about claim.

Sometime, there will be clients who are good at this, isn't it better to sit, listen and ask question rather than trying to argue back?

I bet you can easily throw an argument to counter my 1, 2 and 3 within seconds, but what for?

9 August 2009 at 22:03  
Blogger Market Uncle said...

Thanks Adrian & Donmihaihai for sharing your views.

Arguments are for fun and I like that. Investments are for real and I let my portfolio proof my point (for myself).

1) If rental income ALWAYS exceed mortgage loan, then either property price or bank interest rate will keep increasing (from rising demand) to eliminate such advantage. Anyway, if rents are too high, either the tenants move out or buy the property.

2) Buy low sell high is easy, but buy high sell low is easier, and most end up doing the latter.

3) Leverage is good for property, leverage on margin account to trade options or warrants is even better.

In short, whether to buy for investment or residence, it pays to be cautious and play within ones' means. Leverage can lift a person to prosperity, it can also dump him or her in poverty.

9 August 2009 at 22:48  
Blogger musicwhiz said...

Hi Market Uncle,

Interesting article you have here, and I was also pondering about this for quite some time these last few months (since the property "boom").

I agree with Donmihaihai on his point about argument. No point arguing over something as each of us will have different viewpoints and it will be impossible to agree. Ultimately, what counts is the performance of our investments, be they in equities, property or some other asset class. As investors, we do the best we can to mitigate the risks which we can forsee, and the rest which cannot be prevented we can choose to diversify to reduce this risk.

On what Adrian Khiat mentioned, I had typed quite a bit on property investing on Panzer's blog (, but will repost some of it here for convenience:-

1) Rental income is not guaranteed income, much like dividends from companies are also not guaranteed. Rental rates depend on economic factors and can rise and fall; plus if one cannot find a tenant then one has to bear the entire mortgage loan till he manages to find one, and in a depressed market this could take some time! If rental rates fall it could also mean that mortgage loan amount > rental income per month, which basically means you have to fork out money net net. Hence, there is no sure lunch.

2) Hoping for capital gains on a property is not unlike gunning for quick capital gains for equities. It is akin to timing the market and if one tries to do so, one must reasonably be able to protect his downside and cover his backside before committing; otherwise if your home is in negative equity and you are forced to top up the loan then one could be in serious financial trouble! That said, remember that housing values can fall (sometimes drastically) and interest rates may rise as well, thus the amount of loan installment will increase proportionately too. How to buffer for all this? Make sure one has sufficient margin of safety.

3) Leverage is a double-edged sword, and though one can gain a lot as a % of what one has put down (as DP), one can also lose a lot in relation to the same amount. Leverage magnifies gains and losses, but people tend to focus on just the gains and conveniently forget that losses can occur as well. Trading on margin is similar and is highly risky especially since one may be forced to "top up" when one has insufficient cash during downturns.

My opinion is that rental yield rarely exceeds 5% (except maybe for HDB) and after fees like utilities and condo charges, you probably will be lucky to get away with 3+% rental yield.

A lot of companies listed on SGX can give much better long-term yields of at least 5% currently.


9 August 2009 at 23:39  
Blogger Market Uncle said...

Hi Musicwhiz,
I agree with you and donmihaihai and thanks for sharing too! Money making is not a one way street and hope many will realise this before they get burnt.

9 August 2009 at 23:50  
Blogger Khiat Han Hwee Adrian said...

I agree that Leverage is a double edge sword and Singaporeans generally focus on the gains than the losses. For those who wants to take the risk, they must have the capability to risk it. I know of clients who are highly leveraged with 3 properties when their combined income is around $12k

I believe many Upper middle class Singaporeans remember 2 things:
* The Enblocs rush in 06/07 and how their peers become instant millionaires.
* The Financial Crisis in 08/09 and how it make many people broke when they buy shares.
* Their perception is that Stocks have a higher chance of losses than properties and Property is something they can see and touch. This explains why properties are selling like hotcakes despite that the economy have not really recovered.

I think the people who gained most are the property agents.

10 August 2009 at 15:09  
Anonymous donmihaihai said...

I still remember clearly that Singapore property market(property and property stock) was pronounced dead during 2001 to 2003. What happened next?

During Asian crisis where banking system was breaking apart in Asia, a sg bank went down. Currencies pronounced useless, country defaulted. Read ASIA not US or Europe but what happened to those who went in buy stocks of some reasonable strong companies during that crisis?

During 2001 to 2003, STI was moving nowhere for 10 years or so, Insurance agent(financial adviser of that time)advise build a global profolio. Asia and emerging markets? Forget about it. commodities? Never heard about it. What happened next?

If those were just too far back, just few months back..... who is buying stocks and properties?

....... how to build a system to see two sides of a coin?

11 August 2009 at 21:37  
Blogger Market Uncle said...

History always offer many lessons. Unfortunately they are only useful if people are willing to look that far enough... behind :)

11 August 2009 at 22:09  
Blogger Cheng said...

Hi all,

I find this interesting, just read the page of the link.

Be greedy when others are fearful and be fearful when others are greedy. It works for me in stocks so far, I guess it can be applied to most investment instruments.

Cheers! :D

14 August 2009 at 01:55  
Anonymous Anonymous said...

We have to agree to disagree.

23 August 2009 at 22:47  
Blogger Mike said...

Very good and balanced article. The point about living within your means is absolutely crucial. It doesn't matter if everyone else is buying condos if you personally cannot afford it then don't take on a bunch of debt to buy one. I think it's very disappointing that most people have not learned this lesson yet from the financial crisis over the past few years. I realize human nature doesn't change, but people are supposed to learn from their mistakes. Going forward I think a safer investment than real estate is gold, because the world governments have clearly indicated that they are going to try to avoid deflation at any cost. And all of this money printing is going to hurt fiat currencies, and the gold price and gold mining companies stand to be some of the main beneficiaries of these government programs.

28 August 2009 at 03:21  
Blogger Charles said...

Why would Real-Estate prices keep increasing?
Land scarcity? Singapore is one of the least dense cities

Price will decrease as condos or condo-like buildings become not luxury items but the norm

10 December 2009 at 00:22  

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