{"id":6059,"date":"2016-06-01T02:42:47","date_gmt":"2016-05-31T18:42:47","guid":{"rendered":"https:\/\/www.99.co\/blog\/singapore\/?p=6059"},"modified":"2022-07-01T04:02:28","modified_gmt":"2022-06-30T20:02:28","slug":"housing-profits-illusion","status":"publish","type":"post","link":"https:\/\/www.99.co\/singapore\/insider\/housing-profits-illusion\/","title":{"rendered":"Are housing profits in Singapore an illusion?"},"content":{"rendered":"
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Singaporeans are often accused of being over-optimistic, when it comes to property investment. The truth is, this is not a “Singaporean” or even an “Asian” trait – indeed, excessive optimism with regard to property is common all over the world. In 2006, for example, the total debt owed in home loans in the United States was equal to 99 percent of their GDP. In fact, by comparison, Singaporeans are not too “property crazy” at all. But there are many misconceptions that need to be cleared up.<\/span><\/p>\n

\"Renting
Renting and selling property in Singapore is one of the most popular ways to generate wealth, yet there are instances where housing profits may not materialise<\/figcaption><\/figure>\n

How does residential property investment work?<\/b><\/h3>\n

The typical way to invest in property is to purchase a house, with a low interest rate loan (preferably lower than the rate of inflation). The house is then rented out. In an ideal situation, the income generated from rent will more than pay for the property loan. Further down the road, when the property price appreciates, the investor can then sell off the property at a profit. For example:<\/p>\n

Say you buy a condo at $800,000. You have a bank loan, which costs you $3,000 in monthly repayments.<\/p>\n

You rent out the condo, getting a rental income of $4,000 a month. This turns your property into a cash generating asset – after repaying the loan, you still have an excess of $1,000 every month.<\/p>\n

After 15 years, the value of the property rises; it is worth $1.2 million. You can then sell the house, and your profit would be $400,000 (the difference between the buying price and the resale price), plus $180,000 (you collect $1,000 a month for 15 years, assuming there are no vacancies.) You would make $580,000 in 15 years.<\/p>\n

This is a return of about 72.5 percent over 15 years<\/span>. By contrast, a typical fixed deposit at the bank might give you an interest rate of just 0.8 percent per year.<\/p>\n

So if you had put the $800,000 in a bank instead of investing in a house, you would have around $901,560 after 15 years – a measly gain of around $101,560. That’s a <\/span>fifth<\/span><\/i> of the profit that the condo made.<\/span><\/p>\n

Even better, you would not need the full $800,000 to buy the house. You would only need a downpayment of 20 per cent, or just $160,000. The rest of the house is paid for by the tenants, since the rent they pay is used to cover the mortgage.<\/p>\n

On a more complex level, you could also consider that the rate of inflation (the rising cost of goods) is around three per cent in Singapore. Your property loan interest however, is far below this – home loan rates have been around 1.7 to 1.9 percent for almost eight years now. Since inflation rises faster than the property loan rate, it means the real value of your debt is diminished.<\/p>\n

If you think this sounds too good to be true, and there must be a catch…you’re right. What we’ve described is an <\/span>idealised <\/span><\/i>situation. Don’t get us wrong – the above method has worked for thousands of property investors, and is one of the tried and true methods of growing wealth. But there’s a catch:<\/span><\/p>\n

Under the wrong conditions, property can become a liability that destroys wealth.<\/p>\n

For some investors, housing profits turned out to be an illusion<\/b><\/h3>\n

In the current property slump, we have already seen a number of mortgagee sales. These occur when a property owner is unable or unwilling to make mortgage repayments, and the bank forecloses on the property. The bank will then attempt to auction off the property at the best price it can get.<\/p>\n

Some of these include a four-bedroom unit at The Sovereign<\/a> in Meyer Road (indicative price of around $4 million), a two-storey terrace house at 19 Bedok Walk (around $3.45 million), and a three-bedroom unit at The Bayshore<\/a> (around $1.5 million.)<\/p>\n

By the time a bank forecloses on a property, the former owners should count themselves lucky to escape with minimal financial damage, let alone think about profits.<\/p>\n

There were 241 mortgagee listings in 2015, of which 80 percent were residential. This is the highest recorded number since the Global Financial Crisis in 2008.<\/p>\n

Even outside of mortgagee sales, there are incidents of steep losses in the property market. The most noteworthy is the sale of a three-bedroom unit at The Ritz-Carlton Residences<\/a> Singapore, \u00a0in Q1 2016. The seller, a Permanent Resident from China, bought the unit at $3,815 per square foot in 2013, and resold it at $2,508 per square foot this year. This translates to a total loss of $4.3 million, one of the worst recorded in a decade.<\/p>\n

Another significant loss was a sale at Hillview Regency<\/a>, during which the seller bought a unit at $1,263 per square foot, but resold it at $776 per square foot. In addition, the seller only purchased the unit in 2015, but sold it earlier this year. This incurred a Seller’s Stamp Duty (SSD) of $137,600. In total, the seller is estimated to have lost over $677,000 from the transaction.<\/p>\n

But given the seemingly logical scenario outlined above, how could these losses happen? The answer is that, in the following situations, potential housing profits are likely to become illusory:<\/p>\n