What I wish I knew at 25 about buying property
Hold on to that HDB flat if you can. And build a home with your heart, but make property purchase decisions with the head.
Chua Mui Hoong
Associate Editor
19 November, 2021
I bought my first property at the age of 25. This was in the early 1990s, when the property market was stabilising after the recession of the mid-1980s, and just before prices began to rise sharply in the later part of the decade.
Buoyed by the confidence of youth and three years of steady pay cheques, I made an offer for a freehold walk-up apartment in District 11. It was old with no facilities, but was within walking distance of an MRT station and a few bus stops from my workplace.
The bank gave me 100 per cent financing (yes, 100 per cent), so I didn't even need much cash outlay. When word spread in the newsroom that I had become a property owner, an older colleague approached me and said, half-admiringly, half-chidingly: "You are 25 and you bought an apartment! Your generation is very brave."
I could read his thought bubble: "And foolhardy."
I laughed off his remarks. Interest rates were about 5 per cent then - considered very high by today's standards, but reasonable when compared with the double-digit rates in the 1980s. Servicing the mortgage wouldn't be an issue because my salary was going to rise every year, I (rather naively) assumed.
The truth is, I just wanted my own place. I grew up in a cramped Housing Board flat and never had my own room till I went to university in England. Within months of returning to Singapore after graduating, I rented an HDB flat with two friends. We split utilities bills and chores. I still have fond memories of cooking my first mapo tofu dish in that flat, because my flatmates would wolf it down in minutes.
Now that I am older, I realise I was very lucky to have bought my property in 1993. If I had bought it just three years later, when the market peaked, I would have run into lots of financial problems when prices plunged.
Today, the property market is reaching new peaks. Many younger Singaporeans are understandably anxious to jump on the property bandwagon. FOMO (fear of missing out) is strong. So is YOLO (you only live once), so why not stretch financially and reach for that dream condo, you may think.
But property purchases carry real risks. Since my first purchase at 25, I've been party to, or helped close friends with, several other property transactions. I sold that walk-up apartment years later with some gains. It goes without saying that not all property buys are good investments. Some may be good homes but poor investments, to be sold before their value falls. Some are just black holes sucking up cash.
I've learnt the hard way. Here's a shortlist of some things I wish I knew about buying property when I started this journey.
1. What goes up, can fall fast.
Anyone considering buying a property should study the Singapore Private Residential Property Price Index. This tracks prices over decades, with 2009 first-quarter prices set at 100.
In 1993, when I bought my apartment, the index was about 70. Within three years, by the second quarter of 1996, the index had climbed to about 130, which means prices more than doubled. Then came the Asian financial crisis. The index dived to 71.5 in the fourth quarter of 1998:
If I had bought in 1996 when the index was nearly 130, I would have faced negative equity when the price fell.
This is when the amount of your bank loan is higher than the value of your property. Banks can then ask you to top up the difference with cash. If you can't come up with the cash, the bank has options including forcing a sale (at the prevailing low prices), although sensible banks won't do that as they stand to lose money. Even if they let you stretch out your mortgage payments, it means additional stress.
At 25, I had never heard of negative equity. When I understood what it meant in 1998, I realised I could have faced financial disaster at a young age.
The decades after the 1990s were full of economic shocks. After the 1997 Asian financial crisis came the Sept 11 attacks in 2001, the severe acute respiratory syndrome crisis in 2003, the global financial crisis in 2007, and the Covid-19 pandemic. These caused massive job losses, stagnating wages and general economic instability.
In Singapore, the authorities have tightened loans over the years so that home buyers borrow less for their home, and need to fork out a larger lump sum of cash. This reduces the risk of your property value falling below the loan amount. A slew of additional, even prohibitive, stamp duties on buyers and sellers has also raised the costs of property transactions.
The latest index, for the third quarter of this year, is at an all-time high of 165.
Anyone considering buying today has to be mentally and financially prepared for possible dips in value in the uncertain post-pandemic period and be ready to ride it out for the long haul. Those who bought properties at the 1996 peak, for example, had to wait till 2007 for prices to get back close to what they paid.
2. Don't sell your new HDB flat unless you have to.
Many young couples buy new subsidised HDB flats, live in them for the requisite minimum occupation period (or MOP, five years for most flats) and then sell them on the open market, pocketing the capital gains, which can be in the tens or hundreds of thousands.
From 2020 to this year, up to 50,000 HDB flats will have reached their MOP and be eligible for resale. But most families will hold on to their flats. An analysis on property portal edgeprop.sg of flat transactions from 2011 to
2015 found that 14 per cent were sold within two years of reaching the MOP and 4 per cent were rented out.
However, as HDB resale prices continue galloping upwards, more flat owners may be tempted to sell.
My advice: Stop and think first.
If you have other accommodation and don't need the flat to live in, renting it out might make more sense. I remember an older colleague explaining to me how his Sembawang flat, bought for a low sum, was fetching rental of over $2,000 a month, for a gross yield of over 10 per cent. (Gross rental yield is the annual rental collected, divided by what you paid for the property, without factoring in the mortgage interest and other fees.)
Also, consider that an HDB flat is a one-way asset. You can keep your HDB flat and buy private property. By all means, live in your HDB flat and save up for your dream condo.
But if you sell your flat today and buy private property, you will not be able to buy an HDB flat in the future without disposing of your private property.
3. Not all HDB flats are equal. Go for new, cheaper flats, not overpriced flats in mature estates.
HDB resale flats in prime locations have attracted much attention recently with their million-dollar prices. Meanwhile, new flats in prime locations will be sold under a new prime location housing model with a longer MOP of 10 years, and a way to claw back higher subsidies given for these flats.
After a few years of public discussion on HDB flats' decaying leases, there are signs that buyers are no longer chasing older flats in mature estates, and are favouring Build-To-Order (BTO) flats in non-mature estates, which are newer and have a longer remaining lease.
Here's what an article on property portal www.propertyguru.com said:
2018 was probably the year where non-mature estates rose in appeal, as hot spots Sembawang, Punggol and Choa Chu Kang were offered. Of note was the Teck Whye View BTO project in Choa Chu Kang, which saw a high application rate that surpassed even mature estate Geylang, due to its connectivity and affordability plus a lower supply of flats in the west.
To be sure, BTO flats in mature estates like Bukit Merah and Ang Mo Kio were all heavily oversubscribed in recent launches.
But non-mature estates also had their own supporters. As new estates like Punggol and Sengkang get developed, amenities and transport links - hallmarks of mature estates - improve dramatically. Early buyers in these estates are able to resell their flats for big gains.
The edgeprop.sg analysis of 2011-2015 data reported that four-room BTO flats in Punggol and Sengkang sold within two years of MOP yielded an average profit margin of 186 per cent and 164 per cent, respectively.
In the resale market, too, non-mature estates are holding their own. The price gap is narrowing between resale prices in mature estates (where the flats tend to be older) and those in non-mature estates (where the flats tend to be newer).
A study by Huttons Asia in June found that buyers are "more willing to pay for newer flats than flats with a shorter remaining lease", said the property agency's director of research Lee Sze Teck. New flats are in non-mature estates such as Sengkang, Hougang and Punggol.
The report also said:
We believe that this trend is likely to continue in the years to come and it is possible that we will see a million-dollar flat in a non-mature estate soon.
As wait times for new BTO flats lengthen due to Covid-19 disruptions, many young couples may be tempted to buy resale flats. This has caused the HDB resale price index to rise to an all-time high of 150.4 last month, with a 2.7 per cent hike just in the third quarter of this year. Over the year so far, resale flat prices have risen 8.9 per cent.
Other couples may be considering selling their outlying BTO flat after the MOP to buy a resale flat nearer town. They should choose their purchase with care and not overpay for a flat in a mature estate.
If I owned an HDB flat today, I would keep it till it hits about 20 years old and then sell it. The person who buys the 20-year-old flat from me can still benefit from rising prices for another 10 years, and so can be expected to pay me a good price for the flat.
Assuming each buyer holds the flat for 10 years, my buyer may have problems getting a good price when it hits 30 years old, as the next buyer will see the flat hit the 40-year mark, which would be nearing the middle of the 99-year lease when prices are likely to plateau if not dip.
Each time I hear about a young couple buying a 40-year-old flat for half a million dollars, I wonder if the flat will retain its value when they (the couple) reach middle age, by which time the flat would be 60 years old. If I were younger today, I would not fork out large sums for a 40-year-old flat, no matter what its location is. I would choose younger flats in newer towns.
4. Buy property with the head, set up home with the heart.
(In other words, separate the emotional appeal of setting up home from the financial goal of buying property.)
Often, young people - couples or singles - can't wait to set up home, as I did at 25. Having a place of your own is part of growing up, and a sign of independence and achievement. When something has strong emotional appeal, it is too easy to fall into the trap of overvaluing it financially.
My advice is to separate the two: Think about the desire to set up home and how best to meet it. You can buy, rent, ask to live at a relative's place, apply for employer housing if any, or even negotiate for extra space at your parents' or in-laws' homes so the two of you can have a private living area, not just a shared bedroom.
Then consider the purchase decision separately. Take a hard look at whether you want to buy a residential property, and if so, whether it is an HDB flat or a private property.
As a property purchase is a big- ticket item, treat it as you would any investment. If considering an HDB flat, my advice is to go for the newer flats that have price upside.
If considering a private property, think about whether you want to park your money in this asset, which is no longer the best bet for retirement.
A recent, widely reported study by DBS concluded that property was no longer the best retirement investment option, as price rises outstrip income rises and are seen as unsustainable. Property prices are now 15 times annual median household income, up from nine to 12 times historically.
A DBS property analyst said property yield is under 2 per cent, compared with a portfolio with real estate investment trusts that offer 5 per cent to 6 per cent, tax-free.
Property investments are no longer a sure bet, as population growth declines, immigration rules are tightened, and as millennials and Generation Z workers, who are used to the sharing economy and see themselves priced out of the property market, are not averse to renting their homes.
I've had many people warn me over the decades that parking a large lump sum in a property and then spending the next one or two decades servicing the mortgage loan is not a good financial decision and that it would be better to park my money in stocks or mutual funds. I would listen politely and then go on anyway to sign the option to purchase.
In truth, I enjoy the process of buying a property - the house viewings, the research into the local factors, the narrowing down of options, and then the thrill of negotiating a deal to agreement.
In my case, I needed to separate the emotional and intellectual satisfaction of hunting down a good property asset from that of finding a home to live in.
If I knew then what I know now, I would have bought an HDB flat as soon as I could and held on to it, securing a place to live in.
Then I would channel that energy spent property hunting into something else - perhaps picking stocks. Same psychic satisfaction with potential for asset appreciation, a lot less financial outlay and heartache.
But trading in stocks, or bonds, or funds, or currencies, carries risk. At 25, I bought into my pioneer-generation parents' belief that nothing is as secure as owning a piece of land (or a slice of it in an apartment).
Now in my 50s, I know that property is an illiquid, immovable asset and there are other ways to attain financial security that do not require you to make a huge upfront financial commitment to a lump of bricks and mortar.
Knowing this is not guaranteed to satiate the property hound, but may be enough to at least bring it to heel.
https://www.straitstimes.com/opinion...uying-property
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