Most people around the world often mistake buying a home to be an investment of any sorts. The first house to our name – or a home we live in – is not an investment. It’s probably because of this misconception about any property being considered as an investment that young couples are taking up expensive homes in hopes of getting a quick buck.
After all, most of us wouldn’t want to imagine living in the same house for the most part of our lives, would we? The thought of moving into a more luxurious apartment or even landed property just makes people’s hearts flutter in excitement and accomplishment. But the property market has been hit badly for some time now and especially so this year.
Not only is the housing sector hit, office rentals and shopping malls are seeing record-high vacancies as well.
Property investment is a really long-term investment
Looking at the chart above, any five-year periods wouldn’t make much sense for property investments, which is essentially the minimum length of occupancy before one can sell a Housing Development Board (HDB) flat in Singapore. We also know that from this chart, most of the baby boomer generation or generation X who bought their houses more than 30 years ago, would make quite a decent profit if they were to sell their houses now.
In those cases, they could sell their first house and probably buy a smaller and cheaper house and still be left with some money. But with property prices this high now, it is easier said than done. Which brings us back to the point about property investment – your first house or the house you’re living in is not an investment. Unless you’re able to make a profit after buying a new property of similar value as your current residing property, you can hardly call it an investment.
Interest rates and inflation are main drivers
Most property bulls tend to forget that property prices are mainly driven by low-interest rates or high inflation rates. For the most part, Singapore’s GDP growth rate had been healthy up till the recent years. If anything, GDP growth rate has been stagnant and inflation rates are getting closer to zero.
Of course, there are other external factors affecting the housing prices in Singapore. Interest rates have been extremely low in the US, Japan, and Europe. Because Singapore is very sensitive to the US, the interest rates and housing prices here have been rather flat ever since ultra-low interest rates were the norm.
Mass delusion and bull market psychology
Then one would be thinking: interest rates were ultra-low ever since the Global Financial Crisis back in 2008/2009, why did prices rise then? Warren Buffett believes that properties have intrinsic value, just like stocks. He will never pay $500,000 for a house that is only worth $250,000. But people look at historical prices of properties and just think that property investment is a no-brainer.
That’s when prices are propped up by pure sentiments and not backed by fundamentals – just like stocks. It was reported by TodayOnline that we are seeing a twelveth quarter of decline in the non-landed Private Residential Property Price Index (PRPPI) while more houses are being built. “Every single indicator suggests that the market is in the midst of its longest downturn ever and unlikely to stage a quick rebound. Yet, buyers do not seem to care.”
Conclusion: Invest in properties now at your own risk
No matter how we look at it, the risk we have to take for somewhat less-than-decent returns in the property market is hardly justified. Of course, this is not to say everyone should not buy or sell houses right now. It is more of understanding what we’re getting ourselves into, especially when we’re buying a new HDB flat or landed property.
And most importantly, our first home is not an investment. Sound investments should be easily liquidated if the need arises and liquidating our living home for returns doesn’t look like a sound investment, does it? A second house is indeed an investment but taking on an extra liability isn’t the best for most middle-income Singaporean investors. In this respect, investing in the stock market is a lot more feasible and manageable.
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