Buying property: A reality check

How times have changed. A HDB flat being sold at S$1 million, COE for cars at S$70,000 and bungalows being marketed at S$100 million. Singapore is now one of the world’s most expensive cities to live in. For many, change has come fast and furiously.

Q2 2011 data shows that more than half of private property sales were “mass market” homes sold below S$1,200 per sq ft – what would have been a hefty price tag a few years ago. At the other end of the spectrum, Good Class Bungalows are now close to three times the value they were five years ago.

As the economy continues to grow, buying is still prevalent even after three rounds of regulatory changes. Furthermore, as Singapore continues to strengthen its reputation as a safe haven for investments, overseas investors will be drawn to invest in the local property market. The strong Singapore dollar, low interest rates and easy access to loans are undoubtedly strong reasons driving this.

Making an informed decision

According to the URA Property Price Index, a property of the same size and age priced at S$1 million five years ago will cost S$1.69 million at a similar location today. However, with the cost of purchasing – such as stamp duties – increasing significantly, it could represent an additional S$158,700 in cash being required for the downpayment alone.

Considering that the average income per capita in Singapore last year was just under S$60,000 per year and has only grown 14 per cent in the last five years, this constitutes a considerable amount of money.

So why do we still see strong interest in buying property? I sense a level of “panic buying”, driven by fear that the property market would be unreachable for a buyer in the near future. Furthermore, property continues to be the preferred choice when it comes to long-term investments as alternate options are viewed as higher risk.

If there is an immediate need to purchase a property, it is critical that individuals assess their current financial position thoroughly before taking the plunge, in order to not over leverage themselves.

If property is being purchased for investment, investors should evaluate the cost of holding property against the potential returns which would include rental and capital.

Currently, any rental yield upwards of 3 per cent would be considered a good return considering that the cost of borrowing would hover under 1 per cent. However, in the event of a major correction in the market, a forced sale may not be enough to cover any outstanding loans and potentially any past returns could be wiped out.

When it comes to evaluating the affordability of a property, financial advisors would be best able to help individuals determine this with their expertise.

Take a prudent approach

With continued concerns that interest rates will rise and new regulations will be introduced for the property market, it would be imprudent to presume that the good times will continue to roll.

Although unemployment rates are low, it must be recognised that most households today are dual income. This could mask real affordability, as any decline or loss of income of either partner could cause a significant impact to a family servicing a home loan.

The reality is, with the rising costs of financing a home, one must be prepared to work longer into his golden years to complete financing a home, extending his retirement age. But it is not all doom and gloom. With good preparation and financial planning, one can take charge of preparing for that instance. That starts now.

By Alvin Lee – head of secured lending (Singapore and South-east Asia) at Standard Chartered Bank.

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