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Lessons From Disastrous Property Investments: AK (ASSI)
Aspire, Personal Finance | 30 December 2014
By: AK(ASSI)
Articles (41) Profile

I read in The EDGE that there will most likely be “a new level of pain” for landlords of residential properties in Singapore next year because rents and prices of properties are sinking while vacancy rate continues to rise.

Regular readers would remember that I said that the writing was on the wall in 2011 and that there was too much euphoria in the air as people just kept flocking to condominium showflats and buying into every new launch there was until a year and a half ago when the 8th round of cooling measures with the stringent Total Debt Servicing Ratio (TDSR) was introduced.

Some of us might remember this report in The Straits Times:

Some home buyers rushed to submit mortgage applications to banks last Friday night before tougher rules on home loan financing kicked in at midnight.

But a day after the Government’s move to tighten home loan financing, the overall effect was muted as only a small segment of buyers are likely to be affected, agents and mortgage consultants told The Sunday Times yesterday.

Developers said it was business as usual at show-flats and they still managed to sell a few units yesterday.

The Monetary Authority of Singapore (MAS) said on Friday that banks have to use a standardised set of guidelines to assess property buyers’ ability to borrow. It also plugged a loophole that let buyers dodge tighter loan-to-valuation limits on their second and subsequent properties.

The restrictions apply to loans with an application date on or after June 29.

As a result, some buyers hurried to submit loan applications before the Friday midnight deadline. A significant number of these were buyers at J Gateway, which reportedly sold all 738 units at its Friday launch.The Sunday Times understands that OCBC received a surge in loan applications on Friday night after the MAS announcement.

(Source: The Straits Times, 30 Jun 13)

These buyers probably would not have been able to obtain bank loans with the new measures which are there to encourage financial prudence. I won’t be surprised that some of these buyers had bought multiple properties too. This “kiasu” mentality that is born from greed is likely to be the downfall of more than a handful of such “investors”.

In the last few years, I continually warned that we must be cautious about buying residential properties in Singapore in order to avoid wealth destruction unless it is a BTO flat or an EC or we have spotted a great value buy.

New launches usually have priced in future price appreciation. Have you wondered why a new project is almost always much more expensive than the surrounding condominiums? Is it only because the land cost is higher? So, it is difficult for buyers to make money from these purchases in a short time of a few years unless the euphoria continues. It is a game of musical chairs and the music (i.e. euphoria) will stop.

J Gateway

484 sq ft shoebox units in J Gateway sold for as high as $1,774 psf in July 2013. That is a price tag of $858,616! Freehold? Nope. 99 years leasehold. Yes, we know that Jurong is a promising location as our government has plans to develop it into a more robust regional centre but it just doesn’t make much sense to me to pay so much for the place now. If that is not pricing in future price appreciation (the price would probably only make sense many years down the road), I don’t know what is.

So, in the next few years, these buyers would have to service their housing loans (in an environment of increasing interest rates) and hope for the best, bearing in mind that there will be no rental income as the condominium is being built.

Now, with mortgagee sales (i.e. properties foreclosed by banks) rising and some expecting them to rise to 2008-09 levels as distress spreads from luxury condominiums to outlying areas, people who have been waiting for a meaningful correction in prices before making a purchase are going to be amply rewarded for their patience. Things are likely to get worse.

“Newly completed condos, including shoebox apartments in the suburbs and on the city fringe, have also popped up at auctions as mortgagee sales in recent months…. some investors holding on to multiple units may have difficulty servicing their mortgage or unable to secure tenants in their newly completed units. Collier’s Ng believes, however, that mortgagee sales of upscale apartments in the prime districts will continue to dominate the auction scene. ”

Source: The EDGE, 29 Dec, page CC9.

Evidently, there are areas which are going to be worse off than others and if you are thinking of buying an investment property for rental income, I have said before that properties in the RCR (Rest of Central Region) would be more resilient and the data has supported this but, remember, if you overpay, you won’t do much better at all. Remember not to pay $1,774 psf for a 484 sq ft shoebox apartment in Jurong, for example. Jurong is in OCR (Outside Central Region), by the way.

“… the leasing market is going to be more challenging in OCR and CCR (Core Central Region), notes JLL’s Ong. He sees condo units in the city fringe or RCR faring better. The city fringe is close to the city and yet more affordable. Rental decline in RCR so far has been the mildest.”

Source: The EDGE, 29 Dec, page CC2.

When I said that the government is determined to bring down the prices of residential properties in Singapore and warned that we should not underestimate the political will of the country’s leadership, there were still many optimists out there saying that demand would stay strong enough to prop up prices. Recent speeches by Minister Khaw Boon Wan and DPM Tharman Shanmugaratnam indicated that prices are still too high. The cooling measures are staying in place.

Some might remember this from October 2013:

“Alan Cheong, head of research and consultancy at Savills Singapore, made his case last Friday at Carlton Hotel marking Singapore Management University’s (SMU) homecoming celebrations for its Master of Science in Applied Finance programme.

“I think barring external shocks, property prices, residential prices will stay elevated,” he said. Mr Cheong argued that a fundamental concern that there will be an oversupply of homes come 2015 is not the case at all.

“The reason is in Singapore; it is a situation of undersupply.”

Source: ST Property

There are many lessons in this blog post and not to ask barbers if we need a haircut is only one of them. It is good to refresh my memory from time to time.

AK is a Singaporean stock market investor and a popular blogger. His blog was created with the intention of educating investors and sharing his investing journey with the target of having a more secure financial future in an uncertain world by creating a stream of reliable passive income with high yields.

AK is a Singaporean stock market investor and a popular blogger. His blog was created with the intention of educating investors and sharing his investing journey with the target of having a more secure financial future in an uncertain world by creating a stream of reliable passive income with high yields.

Please click here for more information about this author.


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