Every body makes money from property in the long run.
However, the narrative through the process and at the end is always different.
And its often something people gloss over because what is important is that they made money isn’t it?
Regularly, the Online Citizen profiled people who have a lot of grievance about the incumbent government, and would like their fellow citizens to think wisely. Sometimes it is finance related, and that is something I would write about. (since Investment Moats is not politically neutral but doesn’t write about it)
This article, is from a “forgotten PAP supporter” (FPS for short) and sought to warn you and me that if we are thinking about getting our executive condominium (EC), we should think well.
Not every one of us will benefit from our government policy and competence.
FPS says he was “enticed” by HDB to buy an EC, Windermere in Choa Chu Kang in 1997, which he took possession in 1999. FPS borrowed from his generous boss to pay for the deposit (what a good boss!).
FPS reflected that he was ignorant and just dived into it.
FPS bought the place for +-S$600,000 and sold it in 2015 for +-S%900,000. In his words, he sold at a very small profit.
When he sold, HDB have a share of the proceed because HDB imposed a S$72,000 sale levy back in 1999 when he sold his 5 room HDB flat.
Currently he has retired to a studio apartment (SA) with his wife. Buying a resale flat would consume a large part of his retirement fund. He did not manage to get the Silver Housing Bonus (SHB) of $20,000. (Kyith: this might be because the annual value of his private property is higher than S$13,000). The SA is 45 sqm, and according to him zero resale value and cost S$109,000. He can only fund it with cash.
He is currently debt free now, have always been prudent with his expenses. He was also able to adjust his lifestyle downwards.
What he would like to warn us about is that servicing through this “investment” of his can be quite a challenge. His career is pretty turbulent. He could have went bankrupt had he not gotten an overseas project management posting in 2004.
FPS felt that if he had stuck with his 5 room flat bought in 1982, he would be better off.
FPS warned that you cannot lose your job, or be unemployed for a long time. Even if you benefit from buying an EC, the benefit would not make you a cash rich millionaire.
I am rather glad that FPS was able to see the things that matter more in his life which is, that he is debt free, prudent, very happy with his living conditions, convenient neighborhood and good neighbors. While not in the context of the article, I wish he would share more about living in a studio apartment.
Here are my thoughts.
Was Windermere a Poor Investment Money Wise?
FPS seemed to think that he might be in a better situation had he stayed in the 5 room flat bought in 1982.
I think if you lived through the period where your flat appreciates in value from 1982 to 1997 and compared it to the appreciation from 1997 to 2015, of course the appreciation of the 5 room flat is great.
Or he might be of the view that, he would have avoided the financial worry of having to service a large mortgage during the early 2000s.
Darius, the CEO of 99.co encouraged me to use some of their analytics tools more and in their condo profile of Windermere EC, you can see almost all the historical transactions for the EC.
99.co have like 31 pages of Windermere transaction data dating back to 1997.
I tried to tabulate the sale transaction data for a 1453 sqft condominium over time and here are the results:
Turns out by selling at 2015 for probably around $950,000 odds, FPS didn’t missed out much.
It probably took him 12 years to break even in 2009.
2009 is a very interesting year because, it not only coincides with the end of the GFC but a lot of those who bought at the height of 1997 finally managed to break even.
If we take into account the $72,000 in levy, and perhaps a conservative $10,000 in furnishing and renovation cost, the cost would be $660,000 and the approximate sale cost after levy is $878,000.
The compounded average growth rate (CAGR) for FPS is 1.6%/yr! If we take out the levy, the CAGR is 2.04%/yr.
It should be noted that, FPS case might be one of the unlucky cases, where he bought when there is euphoria in the property markets. We have also not factored in leverage.
In another situation, the internal rate of return (IRR) would make the returns look more respectable.
Comparing to My Dwelling
To find out whether staying in a 5 room flat make more sense, perhaps we can compare against the appreciation of a 5 room flat over the same time period.
I got lazy, so I thought why not compare against some poor soul who also bought within the same time frame.
My parents also bought their 5 room HDB flat around the same time. My parents bought the flat for $265,000 in 1997, took delivery in 1999 and in 2019, the resale value for the flat is $450,000. ( from 2015 to 2019, price around my place actually went down or stayed the same)
If I were to compute the CAGR of this flat, its 2.55%/yr over 21 years. Since my parent’s first subsidized flat was sold before Mar 2006, the resale levy for a 5 room HDB flat is 25% of the resale value, or $112,500! Suffice to say, we got to get a resale flat (not much upside), or I got to get a BTO by myself.
I look at that CAGR, and I start wondering we are the worst property owners out there. Turns out, some how, my CAGR is actually better than FPS!
It is Our Job to Speculate or Invest Well Not the Government’s Job
What we were hoping for is that, by purchasing an EC, it has some characteristics that make it do better than the traditional HDB flat.
Its volatility is lower.
Its capital appreciation is higher, despite what the economy does.
In this case study, paired against my parent’s experience, it shows that it does not exhibit these special characteristics.
It turns out, the property market sometimes is pretty similar to the stock market.
Mr Market will keep throwing a price out to you. You have to decide whether you want to buy, sell or let it slide.
The government can come up with the concept of EC, but it is up to us to evaluate whether it makes a good investment, and whether it is a good investment at this current point.
There would be many that have a much happier experience with EC. There would also be many that will snicker and laugh at Kyith’s parents for buying a HDB flat at the worst possible time.
Many do not decide the Game Plan at the End, or the Plan is very Superficial
When we do not have enough money, our thoughts is more consumed by accumulation.
Often, the plan is not so well thought out and in the end, we get very surprised financially, in a negative way.
I think many like FPS start out putting their money in an EC, with the hope that the EC appreciates enough to form part of their retirement.
However, there is a difference between a lived in property and an investment property that you buy at the side, to complement your lived in property. At some point you got to think about what is your plan to cash flow this investment so that you have cash flow for your financial independence.
Many have a superficial plan in that they say:
- price goes up
- sell it
- downgrade to a smaller flat
It is an incomplete plan most of the time because:
- they lived through more pain trying to service that mortgage
- they got to a stage where they have build up a lifestyle in the place that they are unwilling to move, or procrastinate to move
- they get uncomfortable of renting out a room (which is their plan), or come to terms with the realities of being a landlord
- they realize that they are not willing to stay in a smaller flat, and after paying off the new flat, with the renovations and furnishings, and the accrual interest paid back to their CPF, like FPS they did not get much cash out of it
- they have no idea what to do with the cash that they realized!
The lack of an exit plan or transition is for me a great gap that is not discussed enough.
I think more could be shared about having a more holistic financial plan with properties that you lived in.
The government have sought to provide some ideas:
- Leaseback scheme, selling and downgrading
- Topping up your CPF SA, Retirement Account, and eventually taking a cash flow from CPF Life (which in my opinion is an annuity that is hard to beat in Singapore)
I am not a property investor, and for the property gurus out there, you can provide the more holistic plan.
Giving people that idea would shift the conversation to number projections.
Comparing the EC versus the Condo around the region
So since I did the data for one, I got curious to see whether does EC’s value over time approach that of a full fledged condominium.
So I see who are Windermere’s neighbors. Turns out its neighbors make pretty good comparisons.
All 4 are 99 year leaseholds. All 4 are like equal distances from the MRT station.
- The Quintet is newer and its an EC versus Windermere which is older
- Yew Mei and Regency Grove are almost the same age as Windermere
I picked out a size of Windermere that is pretty big at 1450 sqft, and sought to find something equivalent.
The table above shows the sale transactions, as taken from 99.co.
Here are some things I observed:
- The most new leasehold has the higher PSF valuation. The Quintet is 6 years younger and happens to have the higher price
- The ECs value approaches that of the full fledged condo
- Regency Grove’s CAGR for 19 years is 1.99%/yr and Yew Mei’s CAGR is 2.50%/yr. You get almost the same as Windermere. The Quintet gets the best CAGR at 5.37%/yr by virtue of being released at the lowest price. Property is a speculation game.
Here is the price trend when we layered all 4 together:
The original title of this article is you can get screwed over even if you didn’t buy an EC. And I think it can be pretty true.
You just have to see the similarities between my parents and FPS. Both bought almost at the same time, just that the kind of property is rather different. I am still living in their investment right now, which means that we cannot effectively monetize for their retirement.
So in a lot of case, the retirement annuity came from the children.
I think for FPS, there are a lot of things that he did not mentioned, which puts a lot of doubt whether his family ends up with a reasonable retirement plan:
- we know the cash gotten is small but what about the accrual amount return to CPF
- if he sold off his 5 room flat bought years ago, for this EC, then by right he could have paid off more of the loans with the proceeds from his 5 room HDB flat. His loan could have been more maneagble
- what was his CPF situation again? Suppose he had reached Basic Retirement Sum, or Full Retirement Sum for both spouses, that creates an income floor that would make retirement much comfortable
In the end, realizing the gains is not what the end game is about.
It is about how much liquid investible assets that you have and how you create a cash flow out of them. And this is often where people fall short of and why we turned to retirement endowment funds.
Property in the end will net you a positive gain. One equation that was not mentioned a lot is that, if this have been a buy to let property, then the rate of return would have been boosted by a rental yield.
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