The COVID-19 situation has brought forth a lot of uncertainty for property investors and homeowners. After experiencing the aftermath of the Asian Financial Crisis (AFC) and the Global Financial Crisis (GFC), investors will usually fall into one of these 3 camps.
The motivations of these investors vary and are a result of past trauma or reward. Do you see yourself in one of these camps? Property agents and financial advisors will always mention that there is an opportunity in every crisis. We believe this to be true, have a read into our article to clearly understand why this is so.
This article will be broken up into three segments, with the main intention of reassuring you that with good foresight and hindsight, a large number of dud deals can be avoided.
Types of Housing Types and Their Investors (Personal Foresight)
Different Housing Policies Which Controls the Singapore Real Estate Market (Government Foresight)
Analysis of Global Financial Crisis Losses (Hindsight)
How These Three Aspects Will Ensure That Your Investments Are Secure
Types of Housing Types and Their Investors (Personal Foresight)
The housing sector in Singapore is highly unique because it can be categorized into many different sectors. This allows for plenty of different options for aspiring homeowners to get into their first purchase. Let us break up the residential housing market into different categories and risk for you to visualize better. This point will allow you to plan your investment exit strategy clearly.
Public Housing (HDBs) / Executive Condominiums (ECs)
These are housing forms that traditionally serve the low-middle income group or young homeowners. It simply provides housing for its title owners.
Interestingly, HDBs can also serve as a unique form of short-term investment for young couples who register for a Build-To-Order (BTO) flat first, followed by future private investments. They are more cautious in investing and will rather go in with less leverage. Furthermore, grants are being given for these housing types so that it is more affordable for new homeowners.
However, the point of public housing is that it should always remain affordable, which pretty much locks the value of your existing HDB flat. We recommend that you hold onto your HDB flat after MOP no longer than 3-4 years, to maximize the value drawn. We will elaborate on this further.
Public housings are in no shape or form less efficient as compared to private housing. HDB towns and estates all have a key commercial and activity hub. To get into greater detail, the newer BTO clusters are even well planned, till the point where from where you are, all it takes is a short 5-10 minutes’ walk to your closest, grocer, supermarket, Doctor, etc.
Information on HDB towns and Estates can be very exhaustive, and go beyond the scope of this article, so we recommend that you read the following articles.
Private Housing (Condominiums)
These largely belong to the middle-high income group, wage earners in their 30s onwards. Condominiums are usually the ideal type of real estate type for investors who are keen to grow their wealth. This is due to good flexibility in terms of sales and rentals transactions, which presents a more “open market” to Public Housing and Private Landed Housing. An “open market” allows to capitalize on the fluctuations in the market to make a profit. This however brings increased risks for the investors.
Condominiums provide more additional benefits with luxury amenities like gymnasiums, clubhouses, swimming pools, etc.
Similarly, these are all offered as public resources through the ActiveSG initiative, which provides for these amenities to everyone’s benefit.
You might be wondering, if public housing already is such a complete offering for Singaporeans, why would people be interested in private housing? This is due to two factors, convenience and as a function of showing affluence.
This boils down to simple economics, where people are willing to pay a premium for convenience. It’s the same reason why you would rather order in food as compared to takeaways – We all do it!
In regards to showing affluence, we do not mean it in a derogative manner but is expected, based on the theory of Maslow's hierarchy of needs. To summarize this theory, it means that upon fulfillment of simple physiological needs like obtaining food, water, shelter. People will naturally move on to the next stage to fulfill esteem needs like prestige and a feeling of accomplishment.
Back onto condominiums being a strong investment tool, condominiums are largely well distributed across Singapore, which in a sense provides another layer of “convenience” and “show of affluence”.
Singapore’s strategic land planning ensures that all areas to be highly functional. The reason for high prices within a highly desirable location is not due to the inefficiency of other areas, but rather, to provide an additional convenience that the location can bring.
For example, after searching for a suitable rental as a tenant, with your workplace being at the Central Business District (CBD), you have nailed it down to two possible locations. Tanjong Pagar and Paya Lebar. You might not be willing to pay for the additional rental of $500/month for the Tanjong Pagar property, but there are some other tenants with your exact same scenario who might be willing to!
The “Show of Affluence” is a reason why there are high-income districts as compared to low-middle income districts. As such, this contributes to the pricing difference between condominiums in different districts.
Private Housing (Landed Property)
Landed Properties to us, feels like a hybrid between public housing and private condominiums. Most investors who are looking at these housing types, typically do not wish to be exposed to the dangers of real estate investment by flipping to achieve capital gains or through rental income. Most have already earned their wealth through alternative income sources such as businesses.
Their main focus is to occupy it themselves, but yet at the same time, to obtain long term appreciation through Singapore’s unique housing policies. Furthermore, areas that consist mainly of landed properties are gazetted special areas. This enforces its unique traits and small supply, which leads to capital appreciation in the long run.
The unique characteristics of housing types in Singapore ensure that homeowners are able to live comfortably in their homes regardless if it is public or private housing.
In addition, there is a good variety of spread of housing types across Singapore. This adds to the affordability of private housing in the Outside Core Region (OCR). This enables homeowners who are interested in upgrading towards private housing. It also provides a natural hedge against investors who are overly exuberant on purchasing a property out of their reach.
To protect the Singapore housing market from a huge variation in pricing, there are further government policies that add to this stability. Elaborating into detail on these different policies will be very tedious for those that are new to the subject, and will result in us sidetracking. We have linked it below to other government websites should you be interested in reading further.
Different Housing Policies Which Controls the Singapore Real Estate Market (Government Foresight)
Outside of your immediate control, lies the real estate macro-environment. Fret not, however, as the following policies set by the government to protect your hard-earned real estate investments. Many of them are a result of past financial crises, and with every implementation, adds to Singapore’s resiliency towards the next global financial uncertainty.
Total Debt Servicing Ratio/Mortgage Servicing Ratio (TDSR/MSR): These are the Monetary Authority of Singapore (MAS) rules on how much of a borrower’s income for a housing loan can be used. This prevents repayment issues should the borrower is unable to service their monthly installments due to overleverage.
CPF Usage for Public Housing and Private Properties: CPF is used to supplement the homeowner/investor savings in regard to a real estate purchase. CPF monies help in this aspect of ensuring that the homeowner/investor can maintain good cash flow. Furthermore, CPF usage is tied to the amount of lease left for HDB flats, this is to ensure that the home buyers are not overextending their CPF loan quantum.
Additional Buyer Stamp Duties (ABSD): The ABSD is a tax that is calculated based on the following factors.
· Whether the buyer is an individual or an entity
· The residency status of the buyer
· The count of residential properties owned by the buyer
These factors will serve as a cooling measure for the housing market, as it prevents a huge spike in housing prices due to increased demand.
Seller Stamp Duties (SSD): The SSD is a tax that is calculated based on the following factors.
The type of property sold or disposed
The date of purchase or acquisition
The date of sale or disposal
Rates applicable
No SSD is payable after 3 years of holding the property. This allows investors to be more prudent with their spending to prevent quick “flipping” without adding substantial value to the property.
This also prevents an excess in resale property supply, which might cause prices to fall quickly.
Restrictions set on foreign property Investors: There is a list of residential properties that have purchase restrictions set on foreigners.
Vacant residential land
Terrace house
Semi-detached house
Bungalow/detached house
Strata landed house which is not within an approved condominium development under the Planning Act (eg. townhouse or cluster house)
Shophouse (for non-commercial use)
Association premises
Place of worship
Worker’s dormitory/serviced apartments/boarding house (not registered under the provisions of the Hotels Act)
As you have noticed, these do not include condominiums. These restrictions help to protect the interests of Singaporeans who have real estate public housing and private landed property types.
Private condominiums are not included in this list, and therefore foreigners are free to invest in them. For the average Singaporean investor, they will not have to worry as typically foreign investors will place their money in luxury private properties. This protects Singaporean interest in private properties so that they have a home to stay in for the long run.
Non-citizen Rent Quota: For rental of HDB flats, these units are protected by a quota set for every block and neighborhood, this ensures that public housing will always be available for Singaporeans.
These are the main policies set on Singapore’s real estate market to ensure that it remains resilient in any circumstances throughout any financial crises. They help protect the real estate market against hasty speculation and foreign investors, ensures that real estate prices do not hyperinflate against the property’s true market valuation.
These guidelines are often reviewed, so as to ensure that it remains effective through our present-day challenges. For example, the last revision for SSD was on 11th March 2017, and ABSD on 6th July 2018 as of writing this article.
From the above chart, take note of how the comparison between the overall sales volume vs the Private Property Price Index for non-landed properties. Even with the drop in overall sales volume from December 2013, prices did not drastically fluctuate.
It shows that resiliency was already being built upon due to the numerous policies being implemented prior to the COVID-19 situation!
Analysis of Global Financial Crisis Losses (Hindsight)
Based on the 15,712 matched caveats of new condominiums bought and resold from 2007 to Q1 2020 (GFC), a large number of investments made in this timeframe was still profitable. This was before the implementation of any cooling measures.
OCR properties were the most profitable, followed by RCR and CCR. This is because there is less speculation involved, and most homes bought have an increased tendency for own occupation as compared to rental collection.
The above chart shows information in regards to OCR properties which were sold at a loss during the GFC and the years in which the ABSD and TDSR were implemented.
Surprisingly, fewer homes were sold at a loss during the GFC than the later years. The following points are our belief as to why this is so.
Residual mortgage defaults from homeowners with poor holding power towards the end of the GFC
People were still widely speculating property even after implementation of the 1st round of ABSD
Misinformation/Ignorance of cooling measures
The last two points link back to personal foresight, and that is why we advocate having strong real estate knowledge.
For the first point, however, might be attributed to the pre-cooling measure eras. Implementation of the cooling measures (government foresight) further reduces the incidences of such scenarios from occurring.
How These Three Aspects Will Ensure That Your Investments Are Secure
The COVID-19 situation is a global pandemic that has contributed to the greatest financial stress that the world has ever seen. This will reveal to investors good investments from the poor ones in a sharp, unfeeling manner. These poor investments are easily avoidable and occur due to greed, misinformation, and sometimes inaction.
For us to broadly categorize Singapore’s real estate resiliency into aspects of foresight and hindsight is a gross oversimplification. We do hope that these aspects will give you a greater understanding and develop your own game plan.
When looking for investment properties, do not just be solely motivated by its profits. Fully understand the reasons for what makes it a good property not just from an investment standpoint, but why a family of 5 will greatly benefit from its occupation.
Summary
We certainly hope that you did not skip all of our content just to read the summary! If you have read through all of the content, thank you! We hope that you have enjoyed it.
To summarize,
Singapore has a high homeownership of 91%, and second in the world, behind Romania. This means all Singaporeans should understand the mechanics which fuel the real estate industry so that you can better prioritize your resources. Ignorance in the subject might lead to drastic consequences which are avoidable with proper real estate planning.
Having good real estate foresight and hindsight will minimize most of the risks in investing during the COVID-19 situation.
Foresight can be further divided into personal and government foresight. Personal foresight relates to your own motivations and financial planning. Government foresight relates to the various cooling measures and policies which were implemented to counter an over speculative market.
Hindsight refers to your analysis of past data from previous financial crises, which in turn allows you to tweak your personal foresight for robustness.
Other economic sectors might contribute to some risks, but as long as you remember the fundamentals, we are sure your investment will be one of the best in your lifetime.
This comes back to the question, which real estate investor type will you be?
The Overleveraged Investor
The Wise Investor
The Wait-and-See Investor
Do you want to be a wise investor? Contact us at +65 96329840 or send your queries to estatemagnates@gmail.com! Our consultations do not have a charge, so let us assist you!
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