In Singapore, real estate is an asset class that every investor simply cannot ignore. Singaporeans love property. Period.
The reasons are obvious: small island with limited land, open workforce with many expats supporting a healthy rental market, resilient economy that’s plugged into the word economy, relatively rich populace compared to our immediate neighbors, legendary stories of those who have made their fortunes in property.
Property currently makes up a substantial part, albeit a separate part, of my overall portfolio. I currently own 2 units – a public HDB flat as well as a private condo. I have kept my property debt at a very manageable level: the HDB is fully paid for, while the condo monthly instalment is very very comfortable. I always think that most people (based on anecdotal evidence), tend to put too much of their personal investable equity into their 1st house.
That’s understandable. Afterall, your first house is special. There’s a lot of emotion attached to buying your first house. Understandable, but IMO, not necessarily wise. If you caught the start of a property bubble, great. But if you caught the peak, and having the bulk of your investable equity locked in a supposed investment, that has a compounded negative effect that’s there even many years down the road.
On top of that, most people stay in their first house. That means it’s hardly considered an investment. You don’t get rent. That’s kinda like buying a company with zero cashflow and zero profits and hoping the next guy comes along to offer to buy the company at a higher price than yourself. The “Greater Fool” theory of investing.
But that’s another story altogether.
I’m currently, as I believe many others are, waiting and getting primed to buy another private property for investment. So the key question is, is it time yet?
To answer this question, I believe one has to look at the global macro picture. Afterall, major changes in our Sg property market has inevitably been due to global conditions. This chart says it all:
1997: Asian financial crisis
2001: September 11th terrorist attacks
2008: Great financial crisis
As evidenced above, since the mid 1980s, our local property market has experienced 3 major corrections. The most recent gentle slide, in comparison, has been really mild.
Why the difference? The main reason is that the previous 3 crashes are caused by global events. They are much greater in severity, and the tools that the government has to mitigate the crash is limited in it’s efficacy.
Afterall, we are plugged into the global economy. A worldwide or regionwide crisis will hit our local property market heavily, regardless of any supportive measures.
In contrast, the recent slide since 2013, has been self imposed. Even after 11 consecutive quarters of slides, we are still substantially higher than the previous peak in 2007/08.
The best period to capitalize would have been the recent steep drop in 2008. This is because worldwide, policy makers responded with aggressive monetary stimulus, resulting in an equally steep rise, all in a very short period of time.
I wished I capitalized on this. Everyone says property is all about location location location.
I beg to differ.
Property is all about timing timing timing.
Policymakers all over the world are determined to keep printing money to prop up economies that’d otherwise tank. All this liquidity is flowing down to equities, property, bonds and anything investible. Hence the dropping yields everywhere.
How does this end? I have no idea. And when I have no idea, I usually try to find similar historical situations. They may not end in exactly the same way, but history has a way of repeating itself.
The problem is, there is no precedent. US debt has ballooned to all time highs. Never in the history of mankind has US debt been higher.
If you take away the drug supply for a drug addict, he suffers from withdrawal symptoms. If you give him his drug supply, he constantly needs higher and higher dosages to maintain the same high. But what if you could actually really afford to give him higher and higher and higher doses? When does it end? Assuming the drug supply is unlimited, and the drug has no way of directly killing the addict, this can go on and on and on till infinity.
Of course, it does mean that at some stage, the drug addict would have to have an impossibly large dosage to maintain the high. Similarly, if this keeps up, a loaf of bread one day may cost $10k. Hypothetically, and an exaggeration of course.
IMHO, the risks of entering the property market right now outweigh the potential benefits. Sure if money printing continues, the inflationary pressures are there. But the government has already indicated it’s determination to limit the inflow of capital into our property sector. It’s not wise to fight against policy.
The potential downside though, could be enormous. A GFC of the previous magnitudes would make for a very painful lesson if one invests right before it.
Don’t forget property is a leveraged investment. Unless you are paying in full in cash.
I’m still patiently sitting on the sidelines. As an added precaution, any property that I’d potentially be interested in, must be:
- Limited to my field of expertise. This means it’s likely to be a residential property only, and within the CCR of D9,10 and 11. I just find it easier to be very knowledgeable about a smaller area, rather than having more options.
- Distressed assets. Very distressed assets. Sellers-who-need-committed-buyers-within-a-fortnight type of sales.
- Unique. The property must have a certain unique point that appeals to the emotion. A unique feature, a one of a kind view or simply one of the few orientations or apartment types within the development. (eg. a 2br unit in a development with mostly 3brs)
- Comparatively low maintenance. I think of a property investment the same way I would for investing in a company. The rent would be the cashflow, and the initial capital outlay would be what I invest in the company, with the bank loan as leverage. So in many ways, the assessment is similar to a leveraged buyout of a company. Maintenance, on the other hand, is a recurring cost. It’s necessary, but it adds to the strength of the tide that you are swimming against. Maintenance that is moderately high even, makes it a strict no no in my opinion.
- Prepare a larger initial downpayment. Why stick to a 20% downpayment? For safety, I’d be prepared to make an even larger initial downpayment instead of taking on more loans. The larger the capital sum needed for the purchase, the larger the initial downpayment should be. It’s better to self assess, and set a reasonable sum, as opposed to letting the rules dictate what you should do.
I kinda failed to capitalize on the previous downturn. It’d be a real shame to miss the next one.