Property myths are more dangerous than simply being misinformed. It’s easy to correct misinformation (i.e. being told the wrong thing), but myths are self-confirming beliefs and mindsets that are hard to change. For example, when you find out that “walking distance” to the MRT actually pushes the limits of what your legs are capable of, it’s misinformation.
Myths however, are far more sneaky, as they are formed over time, most often with the drip-feed of information from experts and people you trust (e.g. family members). As such, myths make you want to believe them to be true. Once you believe in a property myth that has no basis of truth, you might find yourself seriously burned financially, or trapped by the market and/or authorities when reality hits.
And it’s hard to avoid falling into the trap of property myths. Why? The more you search information to verify the myth, the more you seem to find (it’s called confirmation bias). Before it becomes too late, we’re going to do our best to correct these five most common property myths that Singaporeans somehow seem to believe in with all their heart — and sometimes money:
Property myth #1: Capital appreciation of property = profits
First of all, if you’re talking about capital appreciation of property, remember that the monetary value of almost anything will rise over time, if for no other reason than simple inflation. This is the same story as stock prices, oil prices, gold prices, and a thousand other assets (but you probably wouldn’t get as excited over, say, a barrel of oil than you would over a condo unit).
Now we’re big fans of property, or obviously we wouldn’t be a property portal. We do think property is profitable as an investment, but what we don’t like is when certain salespeople conflate rising prices with profitability.
It’s very easy to pull out a 10- or 20-year chart of almost any district, and show how the prices have gone up. But just because you see the prices rising, that doesn’t mean the owners are making huge profits.
For example, a particular condo cost $900,000 in the year 1995. By the year 2018, the flat is valued at $1,250,000. That’s a healthy 150% increase — impressive at first glance.
But what about the interest on the home loan? Assuming an average interest rate of 3.0% (average interest rates were relatively high back then) and a loan amount of around $700,000, and a 30-year loan tenure, the owner would have paid around $362,o00 in interest.
Then there’s the maintenance costs, property taxes, utility bills, etc. Even at a generous estimate of $400 a month for all of it (averaged out over the years) that’s over $158,000 paid by the year 2018.
Even making these superficial deductions (it’s bound to be more if we go in-depth and include inflation), we can see the actual profit isn’t simply ($1,250,000 – $900,000) = $450,000. Without rental yield, you’d effectively be making a loss of ($450,000 – $362,000 – $158,000) $70,000 over the course of 33 years if the unit is not an investment property (i.e. it’s for your own stay). This is even though significant capital appreciation of the property has occured.
So, property prices will rise and your property will appreciate. But for property to be really profitable, you’ll usually need to be ready to play landlord, and at least rent out a room if you can spare one. If you’re not renting your property out and hope to maximise capital appreciation, you’ll have to — at the very least — buy at the right value/price point and the right location (expert investors can tell you dozens of other factors). This is where a buyer’s agent can prove vital for property seekers.
[Recommended article: Property agent commission in Singapore: How much should I pay?]
Property myth #2: You can jack up the value of your property with renovations
Now here’s where homebuyers start to get weird ideas about capital appreciation of their property. It’s true that, if you want your home to fetch a good price, your house shouldn’t look like the set of a media student’s horror movie. Fixing up the peeled paint, cracked tiles, broken air-con and so forth can contribute to property value and rentability.
Beyond a certain point, however, you’ll see diminishing returns. High cost, big-ticket renovations, which are supposed to add value, are actually quite speculative. Not everyone will pay more for marble flooring, a walk-in wardrobe or a kitchen island. It might happen, but you can never count on it.
A more accurate statement would be that you can maintain the value of your property through renovations.
So, renovate your property for a beautiful home to live in, but don’t do it to second guess some imaginary buyer years down the road, expecting your choice of flooring to bring any gain in value.
Property Myth #3: HDB loans are fixed rate loans
This one is for HDB buyers, and the answer to whether HDB Concessionary Loans are fixed rate loans is a resounding “Definitely Not”. This misconception has come about because HDB loans have been at 2.6% interest rate for a very long time. But the fact is that the loan isn’t set at 2.6%, but 0.1% above the prevailing CPF Ordinary Account interest rate.
The prevailing CPF rate right now happens to be 2.5%. However, the CPF rate is subject to review every quarter.
If you go back to around 1999, you’ll see the HDB loan rate was almost 4%; that’s because the CPF interest rate rose at the time.
So forget the idea that “HDB loans are fixed”. A more accurate statement would be that bank loans are more volatile than HDB loans.
It is true that bank loans swing up and down more than HDB loans. But it’s definitely not true that HDB loans cannot also change.
Property Myth #4: Freehold means you can keep the property for your children, your grandchildren etc.
Contrary to popular belief, freehold does not mean your property is some sacred space that the government must build around. If the government decides that your property has to make way for new train tracks, or an expressway, then you are required by law to give it up.
There’s typically compensation, but you can’t negotiate or refuse the amount.
The only way to really protect against government acquisition this is to try and buy conserved buildings such as historical shophouses (but these cost an arm and a leg, and maybe a kidney too).
Secondly, you should know that most freehold properties — practically speaking — tend to end up lasting as long as their 99-year leasehold counterparts. This is because as the development gets older, the likelihood of an en-bloc sale becomes higher.
And if you think the owners will all resist, think again: many didn’t pick a freehold because they want to live there forever, especially as the facilities age. Also, many property buyers specifically buy freehold hopeful of a successful en bloc attempt, seeing as how developments on freehold land can fetch a much higher premium during collective sales compared to their leasehold counterparts. So, know that you’ll need to fight these determined homeowners if they set up a collective sales committee to get an en bloc under way, and that things could very well get ugly.
Property Myth #5: It’s better to use HDB loans, as your flat won’t be repossessed if you can’t pay
HDB absolutely can take back your flat if you can’t pay them. To be exact, they’re far more lenient than the banks, but that leniency usually comes in the form of restructuring your loan, or allowing you to delay payments. For example, HDB may let you stretch out your loan tenure a little more so you can afford monthly repayments. Or you may be asked to include your working children as co-borrowers to help with the mortgage payment.
The key thing for HDB homeowners is never ever come under the impression that, if you suddenly get retrenched or otherwise lose your income, HDB will give you an understanding nod and write off your debt.
In fact, there is nothing on paper saying that HDB has the obligation to help you find alternative solutions in the event you are unable to service your mortgage. You still need to be responsible for your personal finances and create a savings buffer in case you lose your income. We suggest you always hold six months of your expenses — inclusive of the mortgage payments — in an accessible emergency fund. At the same time, you can also consider insurance products that covers income loss.
In any case, don’t have the misguided opinion of how much “safer” an HDB loan is when deciding who to take your loan from for your flat. This is also why you should do your own research, and never write off on taking a bank loan or refinancing to one.
To be a truly savvy property buyer, always bear these property myths in mind.
Know any more property myths that Singaporeans believe in? Share them with us in the comments section or on our Facebook community page.
If you found this article helpful, 99.co recommends Can your HDB flat really appreciate after it’s 50 years old? and Calculate rental yield in Singapore: a quick and simple guide
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