On 16 April 2021, it was reported on Channel News Asia that real estate analysts believe that private home prices will continue their upward trajectory due shortage of supply and strong demand [Source]. With this in mind, the big question now is, "Is it time to enter the Real Estate / Property market now?".
Before we provide you with our view, let us look at how the real estate / property market arrived at this "red-hot" state in the midst of a global economic crisis.
Knee-jerk Reaction
"Investors generally do not behave as predicted by traditional financial theory, in which each individual behaves rationally to maximize utility. Rather, people often behave irrationally and let emotions get in the way, especially when the economy is experiencing some chaos. The emerging field of behavioral finance attempts to describe how people actually behave versus how financial theory predicts they should.
Behavioral finance shows that people, rather than being merely risk-averse, are actually more loss-averse. This means that people feel the emotional pain of a loss much more than the pleasure gained from an equal-sized profit. Not only that, but loss-aversion describes peoples' tendency to sell winners too early and to hold on to losses for too long; when people are in the black, they act risk-averse, yet when they're in the red they become risk-seeking." [Source]
At the start of the Covid-19-induced global recession in 2020, no one knew how long the crisis was going to last. Many lost their jobs and those who over-leveraged were not able to finance their investment assets due to the loss of their regular income. This led to forced sale of the their assets. Panic selling kicked in as well, especially for those working in affected industries and did not have enough reserves to tide through a "winter with unknown duration". Due to this, there was an influx of real estate / property supplies.
Supply & Demand Tug of War
In our previous article title "[Global] Bitcoin? Stocks? Gold? What should you invest in 2021? The answer will surprise you!" , we have shared that the prices of any investments are largely driven by the concept of "demand & supply". With the increased supply of real estate / properties, prices started to plummet. It was even reported in The Business Times back in 02 April 2020, that the prices of private home prices were expected to drop by as much as 8% for 2020 [Source]. As the saying goes, "hindsight is (always) 20/20", we know by now the analysts were all wrong. What the analysts failed to factor in was the volatility of all other asset classes and the impacts of reduced interest rates.
The year 2020 saw one of the highest volatility recorded across all investment classes. Interest rates began to plummet. Investors with investment horizon of 3 to 5 years could no longer turn to bonds or stocks.
Gold and real estate became their next target, either as a hedge to the volatile investment market or as a "safe haven" to park their money. This was especially so for real estate / property in early 2020, where it became very "cheap" to finance due to plummeting interest rates and with prices going down south. With this increase demand, one would naturally expect the prices of real estate / properties to skyrocket.
Time to Cash In
Good news is, if you already own a private property as an investment prior to 2018-Q1, it might be a good time to cash in for some quick bucks (especially back in 2017-Q2). While there is no Minimum Occupation Period for private properties in Singapore, investors need to worry about Seller Stamp Duties, which could be as high as 12% in the first year of purchase but drops to 0% after 3 years (for properties purchased after on or after 11 Mar 2017). Why 2017-Q2? Firstly, the SSD is 0%. Secondly, according to property price index* provided by Data.gov.sg, 2017-Q2 recorded the lowest property price index in the past decade (see Fig.1 ). Owner of first residential property should be looking at taking profit of around 10% from the sale itself (after factoring BSD and interests), without even factoring in rental income for the past 4 years, which should be around 12% for the 4 year period. Even with ABSD for 2nd residential property owners, the profit would still be around 10% since ABSD would be covered by the 4-year rental income. If we take into consideration of the leverage factor, the profit is about 40% of the initial cash outlay.
Time to Go In?
In investment, the number one rule is "buy low, sell high". Without a doubt, if one purchase a property now, one is definitely buying at a relative high as compared to first half of 2020. Is it still advisable to enter the property market in Singapore?
With 3 to 5-year interest rates still low and property prices still climbing, one might think that it is still okay to enter the property market if one is financially sound to service the loans for at least 3 to 8 years (based on historical data, property prices in Singapore goes through a cycle of 5-8 years from peak to peak post year 2000). The minimum 3-year holding period is to avoid paying for SSD (4-12% within 3 years of purchase) and factoring in the rental income of ~3% (with interest rates below 2%), it does look profitable to enter the property market now. However, one must also bear in mind other "hidden" costs such as BSD (and additional ABSD for 2nd or more residential property), agent fees, property tax and rental stamp duty.
In summary, if one's investment horizon is 3-5 years and that this is your 2nd or more private property, then it is not advisable to enter now. Only enter if your investment horizon is of a longer period or if the property has en bloc potential. That said, never bang on en bloc windfall as potential profit as there are many factors that could impact an en bloc sale.
What Should You Do?
As shared, historically, the real estate / property market is rather cyclical and the property prices are expected to enter the next high in 5 to 8 years' time. If you have just entered, while not at the lowest price, you could maximise your (future) profits by driving down costs and selling at the next high. Well-timed loan refinancing and cutting down on costs such as agent fees would definitely help. Many fail to understand that while the agent fee is only 1 to 2% of the entire sale price, it is actually 4-8% of your initial cash outlay (assuming the maximum 75% loan is taken). Start building your real estate / property network now so that when the time comes for you to take profit, you can use your own network to sell the property without the need of a real estate agent.
If you have yet to enter and would want to enter the property, it is advisable to wait. With the global crisis beginning to see improvements, investors who have yet enter the property market would be directing their money to other asset classes, as evident in the recent historical high for US S&P 500 index. A drop in demand for properties would be inevitable and hence a drop in price would be expected. Also, with Singapore's rental price index beginning to show signs of declining, depending on rental income would not be advisable.
Summary
To sum up, even though residential property prices are expected to continue to grow, it might not be profitable to enter the property market now, even with the loan interest rates environment. Be patient and wait for the next chance to enter (expected to be within the next 3 to 5 years' period).
If you have entered in 2018-Q1 or earlier, time is right to cash out now. To maximise your profit, it would be good if you could perform the sale of the property yourself. Unless you are earning $15,000 to $35,000 a month, it would be more economical for you to consider the DIY option (assuming an agent can close 2 deals for a month's work; cost of sales is $2,500 for each property; average property sale price is $1million).
If you have just entered in 2021 and your investment horizon is 3 to 5 years, the price you paid would be on the high side and with rental prices going down, you might incur a lost or your profit would be minimal. If you belong to this category, you might want to work on reducing your costs by doing research, refinance at the right time and rate, and building your own network of potential buyers so that you can perform the sale without the need of an agent. Remember, that 1 to 2% translates to 4 to 8% of your initial cash investment if you take a full 75% loan.
*The residential statistics were compiled from information in caveats lodged at the option stage with the Singapore Land Registry, supplemented with Stamp Duty data from the Inland Revenue Authority of Singapore, as well as data provided by developers for new sales. A caveat is normally lodged by a purchaser to protect his/her interest of a property shortly after the option to purchase is exercised. The prices in 2009-Q1 are used as the base reference price of the index. The indices are compiled based on a Stratified Hedonic Regression method. The value of properties transacted in the past 5 quarters are used as weights. The weights are revised every 3 years. The latest revision was in 2015-Q1. [Source]