Last year, we wrote about why Singaporeans should wait until at least 2017 before they start buying private properties. In light of the fact that home prices are still falling and rental rates declining, we think it’s safe to assume buyers today will get better bang for their buck compared to those who bought in 2016.
The question now turns to whether or not Singaporeans should start buying private properties in 2017, or continue to wait and see if prices continue to drop in 2018 and beyond.
Property Prices Are Still Declining, But For How Much Longer?
On paper, one may think that sentiments have picked up. Developers are coming out aggressively to market new launches and to bid for new government land sites. Along with higher transaction volume, this appears to suggest that the property market is doing better.
Price however paints a different story.
According to URA price index, prices of private properties in Singapore continue falling quarter-on quarter. In the first quarter for 2017, prices decline by 0.4%. However, it’s interesting to note that price of non-landed properties in the Rest of Central Region (RCR) and Outside Central Region (OCR) actually increased by 0.3% and 0.1% respectively.
The rental market continues to remain lackluster.
This is a reflection of the overall economy. With jobs and wage growth slowing down, overseas workers, who form the bulk of the rental market, will be unable/unwilling to pay high rent, particularly when supply is also outstripping demand. Vacancy rate stands currently at 8.1%.
With all these in mind, let’s look at whether it’s timely to be buying private properties right now.
Buying For Your Own Stay
Prices of private properties reached a low not since 2011. There are a few reasons for that.
From between 2010 and 2015, the 3-month Singapore Interbank Offered Rate (3M SIBOR) has always been below 0.5%. Since 2016 however, interest rates have started increasing. Right now, it’s at about 1%.
In our article last year, we rightly identified that interest rates will go up for the year and that we expect private property prices to fall as a result of higher interest, which translates into higher monthly mortgage payment.
Let’s look at the effect interest rates has on property.
Assuming a private property owner buys a $1.5 million condominium and takes a loan of $1,000,000 over a period of 20 years, monthly repayment will be as follow.
|Interest Rate||Monthly Repayment|
A 1% increase in interest rate translates into an addition of $474 a month in mortgage payment. If you multiple this by 240 (20 years X 12 months), that adds up to $113,760. This works out to be about 7.6% of the overall price of a property.
The simple analysis here is that as interest rate increases, property prices should go down, with all things being equal, since home buyers have to consider higher interest rate expenses incurred.
If you happen to have sufficient money to purchase a home for your own family stay without needing a big loan, this could actually be a good opportunity to get into the market. In fact, if interest rates continue to increase, look out for better deals in the market, as sellers would be forced to drop their asking price.
Buying For Rental Income
If you were looking to invest for rental income, it’s not a good time to enter the market. Here are some reasons why.
#1 Gross Returns Would Not Be High
According to The Edge Property, gross rental yield in the market is currently at about 3%. What this means is that if you buy a private property for $1 million, you can expect to rent it out for about $2,500 per month, or about $30,000 per annum. This may seem low, but that’s what we must be prepared to accept from the current market.
#2 Net Return Is Likely To Be Even Worse
Your net return is likely to be even lower. First-time landlords tend to overlook additional cost associated with owning an investment property. Let’s run through some of these costs for your benefit.
For starters, you should be prepared to have an empty property for an average of at least one month each year. That means you collect rental for 11 months each year.
You also need to pay an agent to help you rent out your apartment. On average, this could be about one month worth of rental. In other words, you receive about 10 months worth of rent each month.
You still have to offset that against other areas like monthly maintenance (e.g. $200 per month) and home repairs. On top of that, revenue generated from your investment properties is also added to your income tax. When it’s all said and done, your net return could be only about 8 months worth of rent.
Assuming you rent out your property for $2,500 per month, this would be $20,000 for one year, or a net return of about 2% per annum.
The unattractiveness of investment properties in Singapore base on current market condition is a large part for the reason why prices have been declining. As mentioned above, if you are purchasing for your own home stay, this could be a reasonable deal.
But as an investment property, more and more Singaporeans are slowly finding out (the hard and expensive way) that property investing is far from a sure thing.
Buying To Enjoy Capital Gain
The stories of average Singaporeans making $1 million in profits from their condominiums have led many to believe that property investing is the way to become a millionaire. But just how realistic are these expectations?
We wrote in a previous article how most people fail to factor in other hidden cost when it comes to calculating actual returns that they made when they sell off a property at a “profit”.
These include interest rate expenses, renovation cost, legal fee and agent commission. They also fail to take into consideration the fact that other forms of investments such as stocks, bonds and even their own CPF account could have also attained similar or higher returns if money has been invested through these instruments instead.
Getting a gross profit isn’t always a guarantee. In fact, if you bought a condominium from between 2012 to 2015, chances are that you would currently be sitting on either no profit or losses. These are the stories that people don’t tell you when it comes to property investing.
Considering that the market is still declining and not showing signs of recovering yet, we think it’s premature for anyone to enter into the market expecting to score a quick profit by flipping properties when prices rebound back. Many people do this, especially on new launches, expecting that they can net tidy profits when the development TOP. This is never a sure thing.
If you want to enjoy capital gain, there are other asset classes such as stocks that are more likely to give you a better return over the next few years.
What You Should Do In 2017
If you are already looking for a private property to buy and live in, we believe 2017 is a good time to start looking and shortlisting for possible places. But as we wrote earlier this year, there is no need to rush in to buy private properties now, even if developers and real estate agents try to pressure you otherwise.
In recent months, bargain deals arising from bank foreclosure are starting to be increasingly common. The fact that Sentosa Cove, once thought of as an address that only the rich and famous can be part of, has been affected with prices even lower than Park Place Residence, a development at Paya Lebar, is a timely reminder than nobody is ever immune when they overextend themselves financially.
Investing in properties right now based on the reasoning that prices are llow enough is however not a good reason. If you are savvy enough, there are likely to be better investment opportunities in the market that you should be considering.
However, if you were buying a property with the intention of living in it, and you can financially afford it, we would agree that prices are starting to be quite attractive.
Take your time, search for your dream home, consider your budget and purchase it when the price is right.