Singaporeans have a long-standing love affair with property, and given the way property prices have soared in the last few decades, it’s not hard to see why. Many have come to see property as a solid and reliable investment vehicle that provides stable returns over the long term, and also a symbol for financial success. Like any investment, however, it is essential to weigh the pros and cons before jumping in, and here’s what I feel are some of the good and bad features of property as an investment in Singapore.
Leverage is perhaps one of the best features of property investment, and in Singapore we can loan as much as 75% of the property price based on current Loan-to-Value limit rules. Since property is an asset that can be used as collateral for banks, we can borrow a high amount with relatively low interest.
At a property price of S$1 million, we can borrow 75% of it, meaning we only need S$250,000 plus some lawyer fees and stamp duties which I estimate to be around S$25,000. If the property appreciates by 10% in 3 years, we can sell it for S$1.1 million, pay off the bank loan of about S$750,000, and have a profit of S$75,000 on a capital of about S$275,000, making it almost a 30% profit in 3 years. The numbers are simplified and ignores certain costs like interest, but I am also ignoring things like rental yield which can cover such costs.
Leverage, of course, works both ways, and if the property price fell by 10% instead, you can be looking at a loss of around S$125,000 on S$275,000 – a substantial downside of 45%.
Relatively stable, but upside might be limited now
It is thus worth noting that property prices in Singapore tend to be relatively safe and stable, given the land-scarce nature of Singapore and our increasing population. Property prices have gone up over the past few decades in spite of the government’s efforts to temper price increases with cooling measures every now and then.
There were periods in our history where property prices went down for a while and stagnated, so it isn’t quite the sure-win investment one might think. Over time though, the prices have recovered.
Moving forward, my personal belief is that property might not give the spectacular returns it has given in the past as our country’s population growth plateaus, but it should likely continue to appreciate gradually over the years and be at least a hedge against inflation.
Utility and rental income
Property, of course, has the unique feature of letting you use the place as a residence, or set up business if it is a commercial unit. Personally speaking, moving out and living alone has been one of the most enriching life experiences I’ve had and I believe that it also helps with my various careers. It is far easier to film for YouTube while living alone, and working from home for my day job and tuition is also a lot more conducive.
Otherwise, you can always rent the place out and collect rental income as a landlord. Renting does open a can of worms especially if you encounter bad tenants, and there are plenty of horror stories of that. Beyond just horrible rental experiences, there might also be periods of times where the property cannot be successfully rented out, or times where the rental yield might not be ideal. Each time you do rent it out, it is also likely that an agent and their fees would be involved.
High capital outlay and costs
The biggest impediment to buying a property is probably its high upfront outlay. Not only is a downpayment of 25% required, you also need to prepare for stamp duties, lawyer fees, maintenance fees among other costs. A buyer also have to contend with rules like TDSR (Total Debt Servicing Ratio) when taking out a mortgage as well as the current high interest rates.
Interest not only impacts the cost of borrowing, but also the opportunity costs of such funds. S$250,000 in a good bank account now can gather some 5% p.a. interest or around S$1,000 each month. That’s going away when you plop it down on a property purchase, and now have to pay high interest for the mortgage.
Liquidity is an issue
As a pricey physical asset, property also takes time to sell. It might take months to find a buyer, and then months again for the transaction to complete. In between, you probably need to deal with the hassle of showings and back-and-forth negotiations.
In a world where most investments can be sold with the click of a button, property industry seems to be firmly stuck in the last century where agents are the gatekeepers to buying and selling. You may even encounter bad or unethical agents who are out to make money at your expense, and ever so often we see news articles about such errant property agents.
Property has always been an aspiration for Singaporeans, and buying one’s first property would always be a memorable experience. As much as it can be calculated in the dollars and cents, property buying can also be rather emotion-driven given our society’s belief in it as an investment class, and the prestige often associated with it.
While buying one’s residence remains a financially prudent move, in my opinion, trying to stretch and getting more than one may not be as good as one thinks. In upcoming articles and videos, I intend to explore alternatives we can head into instead, so stay subscribed to the Telegram for more.
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