The headlines on roaring property sales have been in the news for the last 2 - 3 months. Property prices are not exactly cheap but this seems to be no deterrent, especially in the middle of a recession. Those who have missed out on the earlier boom in 2007 have resolved not to miss the boat again this time round. Property is a good investment as it will appreciate and this has always been the general sentiment.
Judging by the weekend crowd at new property launches, Singaporeans have a special fascination towards property either as an investment or purchasing one to live in. It sounds cool to own a private condominium with ‘nice’ facilities but I’m not sure if people have worked out their numbers properly before buying.
Let’s take an example of the purchase of a ‘good’ unit (ocean view) at The Sail.
- Purchase price: S$2,000,000
- Stamp duty: S$55,000
- Agent commission: S$20,000
- Renovation & furnishing: S$100,000
- Total cost: S$2,175,000 (approximate)
Now assuming a 10% down payment, 30-year loan at a low interest rate of 2% (SIBOR has been hovering at 0.69% since the beginning of 2009), the upfront commitment is estimated to be S$375,000. If one intends to sell the property after one year:
- Interest paid in the 1st year @ 2%: S$36,000
- Conservancy: S$4,000
- Agent fee for selling: S$22,000
- Total cost to break even: S$2,237,000
Hence, in order to break even, the property price must go up by 12%.
Imagine if the interest went up by 1% in the second or third year - one would have to pray that the property prices go up by 15% in order to break even. Conversely, if the market cools down by 10%, and the selling price drops to S$1,800,000, the loss would be a whopping S$437,000.
You may ask: What about the rental? Doesn’t it help to cover the mortgage payment? Yes, it sure does. The rental amount should ideally factor in all the miscellaneous costs.
Not withstanding this, there are some key points to note:
1. Interest rates will fluctuate - this will affect your monthly loan repayment from year to year
2. Invest within your means – it is advisable not to borrow the maximum loan limit
3. Do your research – property is a big ticket item; it should never be an impulse buy
4. Consider the big picture – how does a property fit into your overall financial planning, especially your cash flow in the medium- to long-term
5. Buying property is not a punting game akin to behaviour we see in the stock market. It requires deliberation and a certain level of pragmatism about it. If you are planning to buy a property within a year or two, it would be advisable to run through the numbers with your financial planner first.
