Paying the right price for a property

Recently there has been a lot of commotion caused by the apparent pricing of the soon to be launched condominium, Sky Habitat, in the heart of Bishan Central. The sub urban 99-year leasehold development is to be priced in the rage of $1,700 - $1,800 per square foot of built up area. This should include spaces such as balconies and air con ledges which are not really habitable area. Then let us take a step back and think... how did we get to this point whereby a sub urban condominium can command such a price usually reserved for properties in our prime districts? The main reason?

Herd instinct.

A wise man once told me. An investment should be made cold blooded. No emotions. Pure facts and figures.

Fact:

A suburban condominium selling at $1,700 - $1,800 per square foot is rather expensive. A property at The Sail @ Marina Bay was recently transacted at $1,699 per square foot. If a relatively new 99-year leasehold property right in the heart of Singapore's financial district is sold at a price lower than one in Bishan, the figures do seem a little too odd to ignore.

The option on this property was done in January 2012. Which is not too long ago.


Fact:

The development is about a couple of tens of meters from Bishan MRT station. The actual fact remains that Bishan is still about 8-9 MRT stops from Singapore's business district (City Hall and Tanjong Pagar MRT stations). With that being the case, would Centro Residences, next to Ang mo Kio MRT, be a better buy? It is about 10-20% cheaper and it will obtain it's TOP much earlier than Sky Habitat. I never thought the day would come whereby I used Centro Residences as a comparison as a cheaper alternative. That day has come.

Fact:

Bishan 8 is the closest condominium to Bishan MRT (North-South line). That is the line that gets you to City Hall and Tanjong Pagar. It is also less congested around the entrances of Bishan 8 as compared to the roads around the entrances of Sky Habitat. The likely scenario is that prices of Bishan 8 are likely to go up due to the euphoria generated from the launch of Sky Habitat. Certain units in Bishan 8 went for $929 and 949 per square foot in recent months. Yes the project is older and the design is less appealing than the new Sky Habitat but if it is location that you yearn for then Bishan 8 is your buy! New is never a reason more than a feeling. Every condominium will grow old someday. For a matter of fact, buying a completed project would mean that you are using your purchase now rather than have your money locked up in a certain place awaiting for something which you hope will be as beautiful as what you imagined it to be. Suddenly, Bishan 8 looks appealing.

Fact:

You are locking your money in something that you can only physically own 3-5 years later. With the regulations, this will add one count to your residential property count in your calculation of your buyer's stamp duty and your loan eligibility quantum from the bank. Is it such a fantastic buy that one should commit himself to this development thus potentially forsaking his chance to invest in any other property in the near future? Will there be no other better purchases and that you are sure this is going to be the best project for you/ Hard to tell where the market will go. It is rather resilient but there is perhaps more downside currently than upside.


Fact:

Freehold landed (in the same district) is cheaper. It may not be the same lifestyle as compared to a condominium but then speak to the really rich and most (not all) will tell you that landed is the better buy due to Singapore being land scarce. Condominiums are springing up all over the place and supply is rather overwhelming these days. If you are willing to pay up to $1,800 per square foot for 99-year leasehold air space, shall I interest you in a freehold landed property selling for about $900 - $1,000 per square foot for land space. Oh in addition I shall throw in all the air space above your land as well. Even after you renovate the place, your cost may not reach the same per square foot cost as Sky Habitat's.

Fact:

The property market may be nearing it's peak. I am not saying this because I want the property prices to drop. I have a few properties myself and a drop would not make me feel good. However, for the sake of the next generation. We need prices to remain affordable and appropriately priced. Hope is what drives people to strive for. If you are going to price a 3 bedroom apartment in Bishan close to $2 million, how is the 5 room flat owner in Bishan ever going to afford such a property? The valuation of a 5 room flat is about $600,000. It is a difference of about $1.4 million. It is perhaps too much of a premium to expect Bishan flat owners to afford the upgrade.


However, the development will still sell well. (this is my guess. I may be wrong. We shall see)

Reason:

Some Singaporeans have reached a level whereby they value aesthetics and snob appeal of something over any other practical alternatives. There is a reason why a $5,000 Chanel or Gucci (hope I spelt them correctly) bag will sell when a $30-$50 alternative is available. There is a reason why people splurge on a flashy Ferrari or any other sports car for that matter. It is to show their neighbour that "hey! It's expensive and impractical but I can afford it!" The Singapore market has evolved over time and some Singaporeans value design and aesthetics higher than good value for their money.


Reason:

The developer will have a strong sales force with pushy tactics. There will be "early bird discounts", knocking 10-20% of their list price. They will tell prospective buyers that the discount is for the weekend launch only. If you delay your decision, the price will not be there in the near future. This is prevalent in most of such showrooms. Urgency is created and deals are closed. Let us not forget that the showroom will be extremely grand. This is to invoke the senses to urge the buyer to bring out the check book!Let us not forget that the design of Sky Habitat is rather unique. Perhaps some buyers think that they are willing to pay for such extravagance?


Whatever it is, it will be interesting to see how this landmark project does over the weekend. This is a landmark project in terms of pricing and in terms of design. Barring any governmental rulings and a financial meltdown these few days. Sales figures may surprise a few.

"If you buy things you do not need, soon you will sell things you need" - Warren Buffet

Yours Sincerely,
Daryl Lum
(+65) 9009 8731
visit my website @ www.DarylLum.com
read my blog @ www.DarylLum.blogspot.com

$1,000 household income, enough to afford a HDB

If I were the Prime Minister, I would be infuriated at how certain members of parliament have haphazardly spoken in defense of the finance minister's comments that a household income of $1,000 would be enough to fund installments for a HDB flat.

I love the way Miss Josephine Teo actually says that "They don't necessarily know that there are grants available from the HDB that will make the actual size of the loan for purchasing these houses not very big."

Well Miss Josephine, you may not necessarily know a few things.

1) Your assumption is based on the fact that the low income household earning $1,000 can set aside $100 to $200 a month for housing installments throughout the whole loan tenure. You assume that they can take a loan of 20 to 30 years, thus stretching the installments thin to fit into their monthly expenses. This is assuming that all goes well in the family. There are no unexpected events such as a family member falling severely ill. You also assume that the breadwinner will be able to be employed throughout the assumed loan tenure of 20 to 30 years. You also assume that there is no handicapped person who requires special care in the family. What if a child is born premature or with a pre-existing medical condition? Can a $1,000 income support this situation and yet still fork out $200 for housing installments? Please note that this is not realistic as the assumption assumes all other things to be constant and I believe that you know that life is anything but that.

2) Your assumption is also based on the fact that the flat to be purchased is a 2 room flat with only one bedroom and one hall. I believe that you have failed to realize that Singaporeans do yearn to own larger units. Also, 2 room flats seem to be segregated from the larger flat types. There are 3-room flats mixed with 4 and 5 rooms within the same block but 2 room flats seem to be segregated into a cluster of blocks with only that flat type. Are we trying to create a divisive society? Let us not only focus on housing our people. Let us focus on housing our people decently as well. For a family of 4 to squeeze into a 2 room flat, I feel we can do better. Let us not always compare ourselves with places like Hong Kong and say that our houses are big. We are a unique society with unique people. The government at times is employing a "you see, we are so much better off" stand when they want the people to be appreciative of what they have and a "we must do this if not we will not progress" when they want to implement policies which have already been written in stone but the mandatory public consultation did not receive positive feedback. (flashback to the building of the two casinos and the relaxation of the immigration policy)

3) You also assume that everyone spends a similar proportion of their income on food, transport and daily necessities. Data may show that we, on the average, spend a certain proportion of our income on things like transport. However, if you were to think about it, if a household earns $1,000, sets aside $200 for housing installments, $100 for utilities, this leaves $700 for everything else. If there are two studying children and each of them take up $100 a month in school fees, transport and food, we are left with $500 for household expenses and transport for the breadwinner. Please note that there is no "cheaper" transport for the breadwinner to go to work. He cannot go up the MRT and say that he is earning $1000 a month and expect to get a free ride. He has to pay the exact same fare as the banker or lawyer who is earning in excess of 10 times his income. The low income earner cannot go to NTUC and expect to pay less for a carton of milk or a bag of rice. The lower income groups spend a larger proportion of their incomes on daily necessities and transport. Let's face it, majority of us eat the same type of rice, drink the same type of milk, use the same type of toothpaste. However, to some of us, a tube of toothpaste may not be very significant but to some they are spending a large about of their income on such items.

4) The government always tells it's citizens that we as a nation need to save up for a rainy day. We must always guard our reserves. We citizens follow what the government has planned. That is the macro way of looking at things. Then what about the micro perspective? Do these lower income families not require a buffer of their own? Do they not require savings for rainy days? Do they not require insurance coverage to protect the dependents from the loss of that $1000 household income? The state does not and will not provide handouts in the form of social security. DPM Tharman has stated that he does not want a first world social state as it will run us into first world debt. How else can the lower income prepare themselves for the unexpected other than saving and purchasing insurance? Can they then afford it?

5) The government wants to help the needy but at times does not know how to do so. I heard of a story of a mildly retarded lady who failed to sign up for her GST credits, Progress Package and other handouts by the government. She had no idea that she was eligible for such handouts and she did not even know that the government was handing out such goodies to the whole population. Someone kindheartedly brought her to a meet the people's session to appeal as the deadline had long gone. The appeal failed and the reason was that there was enough time for her to complete the registration to receive the handouts. Obviously this person did not pursue the matter. It is like going to a restaurant. The one who makes the loudest noise usually gets served first. Usually to increase the chance of a successful appeal, one has to know which door to knock on and this requires a certain level of intellect and this lady did not have this attribute. 

Gone are the days whereby HDB flats cost a small multiple of a person's monthly salary. There were times when $8,000 could buy a flat when people were earning $400 a month. That translates to approximately 2 years of income. Now, a 3 room flat will set the buyer back in the region of $320,000. Assuming an annual income of $20,000, that is 16 years of income.

Moral of the story? The best social safety net would be to lower HDB prices. Minister Khaw, it is all up to you now...

Yours Sincerely,
Daryl Lum
(+65) 9009 8731
visit my website @ www.DarylLum.com
read my blog @ www.DarylLum.blogspot.com

The weakening of our Singapore society

Extremely interesting report on Channelnewsasia.

There is a saying that the rich are mostly rich because they step on others to get there. This report really proves this point. 
 

http://www.channelnewsasia.com/stories/featurenews/view/1185668/1/.html

Perhaps it's time we take the kindness movement seriously...

Yours Sincerely,
Daryl Lum
(+65) 9009 8731
visit my website @ www.DarylLum.com
read my blog @ www.DarylLum.blogspot.com

HDB prices. Set to fall?

Looking at what the government is doing, I would say a very strong "yes, HDB prices are set to fall." Not just cash over valuations (COV). In general, prices should moderate.

Let us look at this matter objectively. In 2010 and 2011, certain Singaporeans paid COV figures in the tens of thousands and even past a hundred thousand for flats in estates such as Pasir Ris, Sengkang, Punggol, Yishun, Jurong West, etc... Basically outskirts. How did this happen? There was a shortage in supply to meet the growing demand. Let us assume a 5 room flat in Punggol with a valuation of $500,000 and the buyer pays $50,000 cash over valuation. Assuming he takes a bank loan instead of a HDB loan, he would have to fork out 5% of the valuation in cash ($25,000) and another 15% of the valuation in CPF monies ($75,000).

Simply put, the figures to buy a 5 room Punggol flat is staggering.

Cash: $75,000
CPF: $75,000

Repayment for 25 years (Assuming 3% interest rate for prudence sake): $2,133.92 monthly.

Assuming the house needs renovation, the cash outlay would increase by another $30,000 to $50,000.

Is it worth it for such a location? What if 25 years do not go by trouble free? Can you rent the property out? Is it worth it to pay so much COV for a property?

Many Singaporeans fail to understand the purpose of the valuation. It is the market value which financial institutions will base the property upon. Paying COV means that you think that the market is wrong about the value about the property you are buying. You indirectly are telling the valuer, "Hey! You got this wrong!"

In essence, those who paid high COV figures for HDB flats in suburban areas got it terribly wrong.

Pricing is always about demand and supply. I remembered not too long ago, I could count the number of models for brand new HDB Build-To-Order (BTO) flats in HDB Hub with the fingers on the palm of one hand. Today, the BTO models are over crowding HDB Hub. There is insufficient space such that they had to clear a reception counter and even seats near the enquiry desks to place the models. I assume that there are more than 30 BTO models in HDB Hub. Where are all these situated? In places like Punggol, Jurong, Hougang, Tampines. The cost of a 4 room flat can be as low as SGD $200-plus thousand.

Like they always say. A picture says a thousand words...



Now who paid $500-plus thousand for a Punggol flat?

Yours Sincerely,
Daryl Lum
(+65) 9009 8731
visit my website @ www.DarylLum.com
read my blog @ www.DarylLum.blogspot.com

Who caused the ridiculous "cash over valuation" in the HDB market?

I think minister Khaw has got it all wrong in his last statement. He mentioned that it was not the permanent residents (PRs) who caused the cash over valuation (COV) for HDB flats to sky rocket. Instead, it was the private property purchasers who are primarily the cause for such a phenomenon.

Dear Mr Khaw, despite all the good you have done since taking over as minister for national development, you have failed to grasp the basic economic principles that govern how a market should and will behave. It is not only in 2010 and 2011 that we have Singaporean private property owners coming in to compete with HDB dwellers for their next HDB flats. Singaporean private property owners have been doing it since the day they could. They have been doing it for the last decade and the previous one as well. So why then the big jump in COV? The answer is plain and simple minister Khaw.

1) Lack of supply.
There is simply not enough flats built in the last few years to match demand. I believe this will cause multiple buyers to target the same few flats especially if the flats are in good, prime locations. Look at what is happening in the build to order (BTO) scene. Before, there were too few BTO flats are the prime locations were oversubscribed. If buyers could bid with cash instead of opting for a ballot system, let me assure you that the bids would be as high as COV figures in the open market. Just look at where the certificate of entitlement (COE) is heading now that there is a downward adjustment in vehicle growth. Let me assure minister Khaw that if supply had been adequate in the first place, COV will never reach the dizzy heights of today.

2) Failure of the "asset appreciation" policy.
One of the worst policies of all time. It was to ensure a steady growth in HDB prices so that, in theory, HDB dwellers could monetize their flats in future for a higher price than what they paid when they bought it. To appreciate the asset, the only way was to cut supply. Everyone is made to feel that the HDB flat is an asset to them and some started thinking of HDB flats as investments. In fact, to have a title deed to the flat would not make sense to me as the HDB flat is just ownership of a lease from HDB to reside in that dwelling house for a period of about 99 years or whatever is left of it. HDB flats were passed off as investment grade properties when they were not and thus everyone, PRs and Singaporean private property owners alike, saw this as an opportunity to make money.

3) Huge influx of foerigners.
Ok, so what if the PRs were not the main culprits? Indirectly they were. People saw HDB as a sure way to get great rental yield. Suddenly there were so many foreigners flocking into Singapore. They all needed homes to stay in and some Singaporeans and PRs who were eligible to purchase a flat but did not do so before, did so now. Rental for a 3 room flat could fetch approximately $24,000 per annum. A 3 room flat was in the region of $300,000. This would mean a rental yield of about 8%! This is extremely good return for such a small capital outlay. Why then would a person in a right investment frame of mind ever pass up on such an opportunity? If rentals were less attractive, I am pretty sure many people would not have dipped into their bank accounts to purchase HDB flats. Even though there is a minimum occupation period, some rent their properties out despite the possible penalties if caught. The returns are too attractive to be ignored!

Perhaps the minister should ponder about these points as well?

Yours Sincerely,
Daryl Lum
(+65) 9009 8731
visit my website @ www.DarylLum.com
read my blog @ www.DarylLum.blogspot.com

What it takes to be a politician in Singapore

If I were Lee Hsien Loong I would be scratching my head as to what my fellow politicians will come up with. Well let's wrap up an eventful last few months for Singapore politics.

1) Tin Pei Ling saying "I don't know what to say?" Which makes me wonder whether she uses this phrase when she speaks in Parliament.

2) Seng Han Tong passing a remark that came off as him intepreting that Malays and Indian workers in SMRT have a poorer command of English as compared to the other races in Singapore.

3) Now Grace Fu posted a comment on her Facebook page commenting about the recent pay cut.

Let me make this clear to these people:

I do not expect you to earn peanuts. I believe that politicians are to be paid handsomely and I believe the recent cuts in pay are fair and reasonable. However I would like to point out to these people that Singaporeans just wish for them to be politically correct. Not to pass comments that will infuriate sections of the electorate. Everyone has an opinion about something but you cannot just do something as and when you like if you are in that position.

Let me put this in perspective. Soccer players are paid millions of dollars a year. Many are living the lives that we the common folk could only dream of. Yet we have Zidane, who is carrying the hope of an entire nation, headbutting an opponent in a World Cup final. We have players like John Terry having an extra-marital affair with the wife of his own team mate. In normal circumstances if I were playing soccer with some friends, playing rough with my opponent would not cause a national backlash and having affairs is something that happens in every society. However, if you are in the limelight, please behave yourself. I can get piss drunk on a Friday night and post it on Facebook. What would the world think if the prime minister did the exact same thing? Unable to swallow this fact? Perhaps politics is not the right path for a few of our politicians.

Yours Sincerely,
Daryl Lum
(+65) 9009 8731
visit my website @ www.DarylLum.com
read my blog @ www.DarylLum.blogspot.com