Is it time to accept a new normal?

We’re already a few days into the start of a new year and the Singapore property market doesn’t show any signs of a quick recovery. Prices are inching down (though at a slower pace), and buyers are pretty much sitting on the sidelines waiting for either a further fall in prices or the removal of the ABSD (Additional Buyers Stamp Duty) before re-entering the market.

To add salt to the wound, a soft rental market and predictions of a financial downturn is further scaring off potential investors.

Is the property slowdown a good thing?

Apart from forcing practicing agents to turn to other means of income (helloo Uber), the property slowdown has actually allowed prices to soften so that first time buyer or first time investors can actually get a good bargain if they play their cards right. Look at it this way, if you buy with contingency measures set in place for the worse case scenario, you are actually in a better position than someone who buys in a good market, and who is unprepared for a downturn.

That brings us back to the situation that we are in today. Rather than waiting for a single turning point and for things to return to the ’normal’ of the previous years, maybe it’s time to face facts, to welcome the new ‘normal’ and embrace the opportunities that 2016 will bring.

Singapore Property Market in 2016

1) It’s all about the Long Term

Gone are the days of property prices rising continuously and at such a fast rate that flipping properties becomes the norm. In fact, the Seller Stamp Duty (SSD) was introduced to stop this and with it still in force, property owners have to be doubly sure that they’ll have the holding power to weather dips in property prices and rental demand. The reality is that prices are slowly dipping and might dip further with the impending financial slowdown, so the rental potential of the investment property you buy is extremely important. In a good market, the rental yield or the passive income that you collect each month can be a determinant of a good investment property. However, in a bad market, getting clients just so that you can cover the monthly mortgage should be your focus. See point 2.

2) Lose the battle, Win the war.

In a situation where supply exceeds demand, you will definitely be faced with tenants asking for a lower rent or even demanding more furniture etc, which will come as a shock especially if you had the upper hand for the past few years.

If it is one of only a few offers that you receive, re-consider which of these situations would be worse; a slight loss in income (even if it means topping up a few hundred dollars of the mortgage for the duration of the lease) or paying the whole mortgage by yourself for a few months.

If you are still servicing a loan from a bank, the answer should be pretty apparent.

However, instead of feeling blue about having to suffer a loss, you need to think about the fact that the monthly rent the tenant is paying each month contributes to the capital build up of the property. When you sell the property, this would be part of your profit.

Accept small losses as part of the bigger picture. Even if it is a small loss for one or two years, the money that you are putting in can be considered a form of forced savings for your future.

3) Is your HDB still an investment?

Sorry HDB owners (especially those who bought their property between 2008 and 2014). If you were looking at a quick profit by selling your flat, you would be very disappointed. With prices stagnating, you probably would not have made much cash profits when you factor in the amount of CPF you would have to refund. However, should this be the only indicator of a ‘profitable’ transaction?

Even if most of the ‘profits’ or appreciation is in your CPF, this can still be utilized to offset your next mortgage if you are looking to upgrade to fit the needs of a growing family. If this move is beneficial to your family (and your pockets), you should still take advantage of the CPF appreciation because it’ll take a while for HDB prices to go up this high again. Wait any longer and you would probably run a deficit and end up owing CPF i.e. a negative sale.

Why will HDB prices not rise as high in the short term?

The massive BTO supply pumped in,
The new method of calculating how much HDB loan you are entitled to i.e. the Mortgage Servicing Ration (MSR) limits the loan amount that can be taken for HDB flats.
The new procedures where the valuation of the flat is “hidden” from the sellers.

Will my HDB ever be profitable?

It depends on what you consider profits. For you to truly make a cash profit, the price appreciation of your flat will have to exceed the interest rate + the CPF accrued interest rate. If you have a HDB loan, this will mean that to get any cash out from your HDB flat, the prices need to rise at least 2.6% +2.5% = 5.1% each year.

4) Location matters more than ever.

If you are prepared to purchase an investment property, keep in mind its not just about the price of the property , it is also about how easy it will be to rent. A cheap property or low property prices does not necessarily mean that the investment would be profitable.

To determine this, put yourself in the tenant’s shoes. In a market where there’s a lot of choice, why would they go further when they can rent one near amenities and public transportation?

5) Opportunity fund VS using all your life savings

In an uncertain market, the worst thing you can do is to ‘gamble’ your life savings. Even though property investments theoretically can be a relatively safe form of investment, you do not want to add on to the added stress of an underperforming investment.

Set some money aside in an ‘opportunity fund’ that may come your way but make sure that this is money that you can afford to lose.

6) Find legal loopholes & use it to your benefit.

The Government’s Cooling Measure rules are pretty straightforward. 2nd property but you still have an existing housing loan? You’ll only qualify for a 50% loan and you’ll have to pay the ABSD. Buying a 2nd property but you’ve cleared your other housing loan? You’ll need to pay only the ABSD.

Consider decoupling . That way you’ll qualify for an 80% loan and won’t need to pay the ABSD.

7) Find someone who will tell you both sides of the coins.

Everyone hates salespeople. I hate them too. (I know, strange considering my choice of profession) But truthfully, I especially hate how I have to only share how the ‘grass on the greener’ when on duty at a showflat.

You have to understand that agents at showflats are representatives of the developers. They are not allowed to speak ill of a property or to even pitch other properties, even if we think they are more suited to your needs. (That’s natural don’t you think? Imagine walking into an apple store and having the salesperson tell you that you actually need a PC, strange right?)

Speak to us on a one to one basis, and let us understand your needs and requirements. Agents from reputable agencies have access to a whole list of properties as well as get the info first hand when developers give discounts. We’d be more open to giving you the whole story when we’re not in a tight position.

8) Always do a stress test

Remind your agent that you would like do a stress test to measure affordability. The stress test would give you a gauge of how much you will be paying if the interest rate reaches the support level of 3.5%. To add in an additional level of security, predict a scenario where rents fall to a level where you have to top up $200 – $500 to the monthly mortgage of your investment property. Are you still in a good place financially? If not, put off purchasing that property until the market or the rent demand stabilises.

Chicken Little or Warren Buffet?

Chicken little thinks that the sky is falling, while Warren Buffett knows that opportunities are present when times are bad. While we don’t deny the fact that the market is not stable right now, there are also gems out there for you to consider. If you are in a good position financially, consider entering the market when everyone else is skeptical.

After all, would it be better for you to enter the market and have the upper hand when no one is buying or would you prefer to wait for the floodgates to open when the cooling measures are removed?

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