Recently, I was motivated to look for a new house. One of the key reasons is for the children to attend my primary school and thank God due to alumni status, we were lucky to secure a space. The 2nd reason is the house that we stayed in has reached Minimum Occupancy Period (MOP). This means we can either sell or buy another house which means we will incur Additional Buyers Stamp Duty (ABSD).
I was doing my research on Property Guru, 99.co, and SRX. The market is very efficient, it is slightly imperfect for a while only, those below valuation deals will be snapped up very fast. I was looking at one walk-up unit with a quantum of S$1.3 m for around 1500 sqft and it was sold within a week. Recently, I was looking at this apartment which was selling for S$1.4 m. I spoke with the property agent and realize the key reason for the owner to sell. They are willing to sell at slightly higher than S$1.2 m which works out to be around $1000 psf. I am interested to view it this coming Saturday. When I WhatsApp the agent to confirm the appointment, he told me that they are in negotiation and a buyer offers at S$1.25 m. They are going to close the deal.
There are few considerations at the back of my mind when I am making these house-hunting decisions.
Concern 1 : No job in 2022
One of the key concerns will be my employment contract is ending in the early next year 2022. I will be out of a job and I won’t have any more employment income coming in. Then why am I buying a house?
Concern 2 : Debt
I am so close to achieving my financial freedom which should be in 2022 if lady luck is on my side. If I take on a huge debt, won’t it drag me down? Imagine I need to sell 20,000 shares of OCBC and top up with another 150k of cash just for the down payment and miscellaneous admin fees. I will still have around 900k of the mortgage loan.
It means I need to continue to work for the next 5 – 10 years to pay down this loan. It means I need to work in a role that pays me well instead of something which will give me meaning in life. It means slogging long and crazy hours, putting up with lots of stress,
Concern 3 : Opportunity Cost
I will lose out on the dividend from OCBC and any other potential upside. I will lose out on the opportunity cost of the 150k if there’s a market downturn. This is in the context that I don’t sell the HDB. The HDB if rented out can cover around S$3k of rental income.
(Assume a 4% dividend yield = S$0.48 x 20,000 = S$9,600) (opportunity cost)
(Mortgage cost = S$3,500/month x 12 = S$42k) (opportunity cost)
HDB rental income = S$36k
Net contribution to free cashflow = -S$9.6k-S$42k+S$36k=-$15.6
This is risky, I am betting that the interest will remain low and I can find tenants. If either one of them screws up and turns against me, it will be a worse-off scenario. However, there are other factors such as S$42k per annum which will have the bulk of this paid, adding to the house equity and a portion to interest payment. Over the next 10 years, I should see additional house equity of around S$400k + a down payment of S$350k.
Concern 4 – Buying at the peak
I am concern that I am buying at an all-time high. The Property Price Index for private residential properties is at an all-time high compared to 2016. Yes, high can go up higher. We never know when the pullback will happen, maybe it won’t happen.
However, the rental index is flat. See below the image from URA. This means your rental yield is decreasing if you are buying the new launch at S$2000 psf – S$3500 psf. You are betting only on capital gain only. What is the likelihood of another deep pocket coming in to buy this from you? To be fair, the new properties will command higher rental income than old developments.
From the URA website, it shows in the 1st Quarter 2021, Developers launched 3,716 uncompleted private residential units and sold 3,493. The take-up rate is 93%. This is compared with 2,603 units sold in the previous quarter. There is an improvement in Q-o-Q. Developers launched 700 Executive Condo units for sale in 1st Quarter 2021 and sold 647 units. This is a 92% take-up rate. I want to show that there is strong market demand. It is difficult to make money during a strong bull demand for properties.
This is a demand and supply game. The supply pipelines will build up in the next few years. Be patient and pull the trigger when the mammoth is here. Meanwhile, I can go do more market research and do more virtual viewing.
Property hunting is fun. Property is illiquid and it is a very big-ticket item. It is emotionally triggered to make a big purchase. Hence, I try to remind ourselves that we should remain cool-headed at all times. If I want to be in the market, I need to walk the ground and research the few developments around the area. Keep you guys posted if I make any offers.