Housing is still a great place to put your money
By Dr Larry Haverkamp
For most of us, it is the only way to get rich slowly
Housing is back in the news with home sales and prices declining again last month. Will the housing market ever bounce back?
An even bigger question is: Should you take advantage of the doldrums and jump in now? After all, property has been a great investment over the past 50 years, and it's likely to do well in the next 50 as well.
There are four ways to play the market. First, you can buy a home here in Singapore. Or you can invest overseas.
You could also forget about owning a flat and buy property counters instead, like shares of Capital Land or CDL. Another type of property stock is REITs. These are real estate investment trusts which keep their preferential tax status by paying out 90 per cent of their earnings in dividends. They have done well.
I'll focus today on what's most popular: Buying your own home.
Has it been a good long-term investment? A lot is riding on the answer since we have the world's highest home ownership with 96 per cent of Singapore households owning a home.
Should you be a homeowner? And if you are already, should you upgrade? I'd say "yes" to both. It's true that home prices could fall a couple per cent more, but who knows? Short-term forecasts of the property market are almost as unreliable as the stock market.
If we have hit bottom and you wait, you'll lose out. The best approach may be to focus on the long-run and forget about trying to catch the bottom.
How much can you earn?
The big picture looks like this: In the long run - like over 50 years - the return on real estate has averaged just over 6 per cent per year.
That is only the return on assets. More relevant is the return on your own money, called return on equity. It's higher because you borrow money to buy a home, and the 80 or 90 per cent you borrow boosts the 6 per cent return on assets to a 10 per cent return on equity. Hey, that's more like it!
It doesn't stop there. We should also add "imputed rent", which is how much you'll save as a home owner because you don't need to rent. This boosts returns much higher but to be conservative, let focus on the 10 per cent return on equity, which also comes with low risk.
Low risk? Yes, it's because you hold a home for many years and that greatly increases the likelihood of actually getting the 10 per return.
In fact, a home is the only place where a person with limited wealth can finance an investment like the big boys - with an 80 per cent loan (from a bank) or a 90 per cent loan (from HDB) over a very long time (25 years) and at low interest rates of only 2 or 3 per cent.
For example, you can make a downpayment of only $30,000 from cash or your CPF to purchase a $300,000 four-room flat with an HDB loan. If the price appreciates by 6 per cent per year, the value of your flat will grow to $1.3 million in 25 years.
It sounds like a lot of money because it is, and you were able to earn that much because you held for the long-run.
The lesson: Housing is hard to beat. There is no other investment that allows a person of modest means to make a big investment at a low cost and with a good chance of long-term appreciation.
FAQ on home loans
By Dr Larry Haverkamp
Q: Are higher home prices really a sure thing?
A: In the long-run they could be but our instinct is to focus on the short-run where it is harder to see the future. Here is a story that shows how hard it is even for the experts to predict what lies ahead.
In 2005, the US Central Bank Chairman, Ben Bernanke, was asked if US housing prices could come down. He said: "... it's a pretty unlikely possibility, we have never had a decline in housing prices on a nationalwide basis."
He was right. US home prices had never declined year-on-year since the American revolution in 1776.
Two years later, in July 2007, Chairman Bernanke and the rest of the nation got a surprise when US home prices began a four-year-decline. Prices fell by one-third and pitched the world into the worst recession it has seen since the Great Depression of 1929.
Since then, US home prices have shown their resilience and the housing market is nearly back to its former highs.
Q: How about Singapore real estate?
A: While the long-run looks good, new housing regulations are taking a bite in the short-run.
For example, we have a seller's stamp duty of up to five per cent if you sell within five years and an additional buyer's stamp duty (ABSD) if you buy a first, second or third home. It's a tax of 0 to 15 per cent, depending on whether you are a Singaporean, permanent resident resident or foreigner.
Q: What else is holding back the housing market?
A: There are new lending restrictions, like the MSR (Mortgage Service Ratio). It is calculated as your home loan payments divided by your gross income. Banks and HDB won't make a loan that pushes MSR to over 30 per cent.
A similar brake on lending is TDSR (Total Debt Service Ratio), which applies to bank loans. It sets a maximum ratio of 60 per cent for monthly total debt payments divided by gross income. It keeps people from taking on too much debt but that also restricts property purchases.
Q: Are lower housing prices a good thing?
A: It depends on your perspective. If you are a home owner, you probably want to see your investment appreciate, so you prefer higher prices. If you're not, you would want lower prices so that you can buy more cheaply.
For the economy as a whole, it is better to prevent a housing bubble and guard against an economic collapse, as happened when US home prices tumbled in 2008. That brought on the great recession which spread worldwide, and would likely have caused a depression if government had not acted.
The lesson was to let the air out of housing bubbles gradually and better still, do it before the bubble forms, which is the intent of the new housing rules.
"Buy land, they're not making it anymore."
Mark Twain (1835-1910), American author and humourist
Dr Larry Haverkamp is an economist and adjunct faculty member at Singapore Management University.
Top Property Special, The Straits Times, Saturday, July 19, 2014, Pg 1 & Pg 4
you cannot invest in a HDB in Singapore but you can find a lot of HDB prices (or cheaper) properties around our region for investing. The main issue is FX risks and transparency beside the legal framework which can be quite challenging. I will stick to traditional English legal framework countries for investing where I can hedge my FX risks.
yes according to me housing is the most safest and most convinient way to keep the funds.
I personally do it and will recommend others to do it as well.
wait till the bubble pops!
Sentosa Cove now a dead district after property prices plummet by more than 20%.
Go search the internet.
Seems to me there are property agents on this forum.
I'd suggest wait till the next general election before considering if you should spend millions to purchase a condo. Properties in singapore are insanely over-priced. The demand has already dwindled in recent months and we are expecting prices to continue to fall. So hold on to your plans now.
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Property has made quite a number of Singapore rich (ASSET rich in particular) in the last 5 years. in the runup from 2007, the property market has gone up tremedously. Just ask anyone who brought their properties before 2007, most of them would have doubled their money on their property.
Look at all the stock gurus .... can you even rest for a minute without staring at the screens watching the equities tick?
if you were one of those who purchased property before 2007, give yourself a big pat on the back. You probably just slept in your home and did not even have to do anything and your property asset worth doubled. If you had cashed out last year... even more bingo!!!
You decide if property's any good ...
just my 2 cents worth .... happy property investing!!!
While owning a house is a great achivement as a person, it oftens becomes a liability without us knowing. A big house = bigger bills = bigger upkeep. My advice? Keep a simple house and consider investing your money in other things.
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Yes you can invest in housing it is a long term investment.
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