Who should jump into the private property market right now?

October 8th, 2012 Posted

By Getty Goh

In my recent Buy RIGHT Property seminar, one of my participants asked me if he should enter the Singapore property market right now. Based on the URA Private Property Price Index (PPPI), we all know that the Singapore private property prices are presently at an all-time high (see Figure 1).

Figure 1: URA PPPI from 1975 to 2012Q2

Source: URA and Ascendant Assets

Intuitively, it may not make sense for most of us to buy a private residential property right now. Given the uncertain market outlook, there is a high risk that property prices would come down in the months ahead. Nonetheless, there could still be selected groups of people or investors who should consider entering into the property market right now. So who are they?

Group 1: Those who want to make their CPF monies work harder for them.

At present, the interest rates given by the CPF board for monies in the ordinary account is only 2.5% (http://mycpf.cpf.gov.sg/Members/Gen-Info/Int-Rates/Int-Rates.htm). In comparison, the rental returns as well as capital appreciations from buying a property right now could potentially be higher. Hence individuals who want to make their CPF monies work harder may want to invest in a property instead of simply leaving it in the ordinary account.

However, it is important to note that this does not apply to non-residential properties (i.e. commercial and industrial units). CPF phased out the CPF Non-Residential Properties Scheme on 1 Jul 2006; hence CPF monies can only be used to buy residential properties.

Group 2: Individuals who are buying a property for their own use.

Another group of buyers who could consider buying a residential property right now are individuals who are purchasing a unit for accommodation. The alternative to buying a property is renting, however according to data from URA, the median rental for non-landed properties is about S$40.08psm per month (about $3.72psf per month).Assuming a household rents a 1,000sq ft unit (instead of owning the unit), his monthly rental would work out to be $3,720 per month and about $44,640 annually. If the household entered into a 2-years rental contract, almost $90,000 would be incurred as expense. On the other hand, if the household bought the unit that they are staying in, the $90,000 could have been used to repay the mortgage loan on the property that would eventually be theirs.

Group 3: Individuals who are holding onto a sizable amount of cash

There is a popular saying, “Cash is king”; this is especially true when markets are on the decline and when assets are being sold for a huge discount. Many individuals who profited from the property boom of the late 2000s could be sitting on the sidelines and waiting for the market to crash before entering the market again. However, the main challenge they face is to identify when the crash would happen. These individuals who are currently holding onto their cash and waiting for the crash to occur would hardly be earning any returns by putting their monies with the banks due to the low interest rates.Apart from that, the individuals’ purchasing power is also steadily being eroded away by the high inflation rate. Should a crash occur, the Western governments could respond by launching another round of quantitative easing (i.e. printing money to boost economy and spending) just like what they did in the aftermath of the Global Financial Crisis, which in turn could cause property prices to start climbing again and make it even more expensive.

Hence, even at a rental yield of 3%, buying a property could be more worthwhile in comparison to the putting their monies in the bank and simply earning interest rates of around 1% or less.

Conclusion

At this point, I must emphasize that I am not trying to encourage people to buy a property now. However, I am of the view that if you were to belong to at least one the three groups listed above, there could be some basis for you to consider purchasing a property despite of the high prices.

To conclude, when I was conducting research for my second book, Buy RIGHT Property: The Right Approach to Property Investing in Singapore, I found that the median holding period of unprofitable property deals was about 1¾ year. In comparison, profitable property deals were held for about 2½ years. I recognize thatthis does not mean that all units sold in 1¾ years or less were unprofitable or that all units sold after a holding period of 2½ or longer were profitable; nonetheless, this data suggests that owners of profitable transactions took a longer time to sell their units as they could have been waiting for the best possible offer. Conversely, owners of unprofitable deals had to quickly liquidate their properties as they could already be in some form of financial difficulty and were not able to hold out for a more favourable offer to come along.

The main point I am trying to make is that many investors cannot tell when the property market would suddenly crash. Hence the best strategy is to invest with a long-term view and only buy what you can afford. Quoting Franklin Roosevelt, the 32^nd President of the United States, “Purchased with common sense, paid for in full, and managed with reasonable care, (properties are) about the safest investment in the world.”

To offer a balanced view, my next article would be “Who should avoid the property market right now?” Keep a look out for it.