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Buying an apartment: Considerations for first timers.

Wednesday, April 30, 2014

A reader recently asked me if I would blog about buying an apartment for first timers in Singapore. I thought of this before but decided that I am not a good candidate for this topic because for most people in Singapore, their first apartment would be from HDB and I don't have any experience in this area.



However, I have blogged about buying real estate in Singapore before and quite a few times too. So, in case you are thinking of buying an apartment either for self stay or for investment, you might want to consider the following points:

1. To rent or to buy?

In some countries, there is a strong culture of renting. This is usually when buying a home is considered too expensive. This is the case in places like Japan, Taipei and Hong Kong, for examples. In a report, it was stated that more young people in London prefer to be renters in recent years.

Does renting make more sense in Singapore now as well with sky high prices? Well, according to the "Rule of 15", it could make sense anywhere in the world. In a nutshell,

"Rule of 15" says that if we could buy a home at a price that is 15 times or less the annual rent a similar property would fetch in the area, it makes more sense to buy than to rent.

Personally, I prefer to own the apartment I stay in but I can see how renting could make sense especially if prices of homes are sky high. Imagine if rental yield is a miserable 3% per annum and imagine if the price of real estate has peaked (which seems to be the case now), it could make more sense to rent an apartment for the next couple of years.

If a $1 million property should decline in price by 15% in the next 2 years, that means a $150,000 decline in price! Unless we decide to stay in the St. Regis or Orchard Residences, for examples, I think that with $150,000, we could rent a decent size private apartment in RCR (D3 or D4) for 3 years or more. If we were to rent a HDB 3 room flat in the same region, we could rent one for almost 7 years.


2. HDB flats

Of course, as Singaporeans, we are lucky because we have good quality public housing. It is reasonable to assume that for most Singaporeans, their first apartment will be from the HDB. 

Of course, there has been and will always be debate on whether HDB flats are priced fairly but unless we want to move to Johor, we have to accept that HDB flats are the most affordable housing choice for most Singaporeans. 

Using the "Rule of 15" will help us stay grounded and avoid the atas DBSS which were going for as much as $888,000 at one time, for example. (Thank goodness, DBSS has been thrown out together with MBT.)

Although we could choose a housing loan with a duration that terminates at age 65 and I am assuming that most people need a loan to buy their first apartment, I think we should aim to keep the cost of borrowing down and to make complete payment within 5 to 10 years. This should become a more important consideration in an environment where interest rates are more likely to increase. So, the POSB HDB Loan is a good idea for people who want to do this.

"Interest rates will not stay so low forever and anyone who signs up for this new POSB HDB loan should do so only with a contingency plan to pay off the entire loan at the end of the 10th year. It is a contingency plan and this means that the borrower should have the ability to do so but he doesn't have to if circumstances remain benign."


3. Condominiums

Of course, there will always be people who would prefer to stay in private housing and anecdotal evidence shows that the numbers are probably larger than what we might think. 

If we think that HDB flats are expensive real estate, then, condominiums in Singapore are simply too extravagant. A BTO 5 room flat in CCK costs about $300.00 per square foot. An executive condominium in CCK will cost at least 2.5x that amount while a private condominium in CCK will cost at least 4x that amount.

Condo living is not a need. It is a want. Consider carefully whether we can really afford it, which is an objective exercise, and consider carefully if it provides value for money, which of course can be quite subjective. It would be utter misery if we were to become a slave to our home as we sweat to service the loan instead of enjoying our home with peace of mind.

"If to stay in a condominium, we are forced to live like paupers, the price is too high."


MAS has a good page on "Buying a Home":
http://www.mas.gov.sg/moneysense/life-events/buying-a-home.aspx



If you are going to buy your first apartment soon, you might want to bear these in mind as you think of the options available. You might also want to read the related posts below which this blog draws from.

Buying an apartment is probably the single biggest financial transaction for most people. Don't be swept away by emotions.

Staying grounded will help people to keep their finances healthy and, also, their homes.

Related posts:
1. To rent or to buy: Rule of 15.
2. POSB HDB Loan: Peace of mind.
3. Slaving to stay in a condominium.

14 comments:

Passive Income Builder said...

The rule of 15 is a wonderful rule! If I spend 4k on rental a month, that will work out to 720k for that apartment in 15 years. If the price for the apartment is above that, I should not buy that apartment!

AK71 said...

Hi PIB,

I find it useful myself. Also, it keeps me grounded in helping to prevent overpaying for a property.

We could modify it to suit our needs too. So, for example, if we are thinking of buying a property to occupy for the next 30 years, we could make it the Rule of 30 instead. ;p

There is nothing scared about the rule. It is just a useful guide. :)

Cory said...

Basically is a function of rental yield. If to appply the rule to taipei, no one should be buying any property there ! The yield is only 1.8% in central area.

AK71 said...

Hi Cory,

I have some friends in Taipei who say they cannot afford to buy an apartment and think they never will.

Actually, in Hong Kong too. Many young people say that it doesn't make any sense to buy an apartment even if they can afford to. They rather rent.

EY said...

Hi AK,

To buy or rent - the decision might lie in one's marital status. Those with family would probably consider buying a roof for the next generation in case they don't make it good in life. It's like a form of insurance. :)

As to the price one would pay, it really depends on the timing of when one plans to start a family and what one can afford without overstretching. It's certainly a good idea to find the cheapest form of housing available.

For singles, buying to stay is more of a lifestyle choice. I'll approach it purely from the financial point of view.

AK71 said...

Hi Endrene,

Definitely, each person's circumstances will have a bearing on the final decision. :)

Whatever the circumstances, however, making prudent financial decisions will go a long way in helping to keep the family together in more ways than one.

Incidentally, my next blog post on real estate (inspired by an exchange on FB) will touch on the issue of affordability. ;)

44b3eb0a-80f7-11e3-9782-000bcdcb2996 said...

Hi AK,

Thank you so much!

:)


Tree

AK71 said...

Hi Tree,

Oh, dear. What did I do to deserve this? I blur. -.-"

AK71 said...

I shared this on my FB wall:

It all depends on our motivations.

If we want to leave a legacy for future generations, FH or 999 years leasehold makes more sense. Don't have to worry about lease decay. Landed or not, the issue of lease decay is the same.

If we just want a place to stay in our lifetime, HDB BTO flats makes the most sense financially in Singapore (if we qualify). Condo living is, quite honestly, no big deal (and an extravagance).

If we want to invest in real estate for rental income, then, rental yield must be make sense. However, we must also look at the remaining lease of the property. The rental yield could be relatively high but the properties could be on 99 years leasehold land and built in the 70s (e.g. People's Park Complex).

We must know what we want and use the right tools. Know what we want and get the right property.

Kevin said...

Hi AK,

Is the residential property you living in a FH,999 or 99 years leasehold? just curious. ;)

Ricky said...

Just read this post, thankfully i didn't overpay for my flat. :)

AK71 said...

Hi Kevin,

If I had qualified for a HDB BTO flat, that would have been my choice. Of course, I could also have bought a resale HDB flat at 35.

However, I wanted my own place before I turned 35. So, I had to buy private. Since I must buy private, I prefer buying something with a longer land lease than a shorter one. ;)

AK71 said...

Hi Ricky,

It is almost impossible to overpay for a HDB flat in Singapore. :)

AK71 said...

“Our friends told us about these DIY (do-it-yourself) platforms and we thought: ‘Why not? There’s no harm trying’,” said the 39-year-old who declined to reveal her full name. “It was quite easy. We took some photos of our house, wrote a description and posted them online.”

While the couple did meet a few prospective buyers through the property agent, Ms Lee said none went ahead with an offer. Nearly two months later, the Lees sold their flat to an agent-free buyer who contacted them through their listing online.

“We decided to settle the paperwork ourselves,” said the administrative manager, who added that the process was easier than she thought. “We were surprised because we thought it would be quite complicated. The officer at HDB (Housing and Development Board) was also very helpful to go through the paperwork with us.”

“Most importantly, I saved a commission that’s worth about S$10,000 so I think we are happy,” she told Channel NewsAsia. Property agents typically charge 2 per cent for the sale of an HDB flat.

People like Ms Lee, who have tried to complete a property transaction on their own, are growing in number in Singapore.

According to figures from HDB, the number of resale flat buyers and sellers who have gone the DIY way rose to 24 per cent in 2015, from 11 per cent in 2010. So far this year, 23 per cent of resale transactions carried out from January to May were completed without a property agent.

Source:
http://www.channelnewsasia.com/news/business/singapore/tech-disruption-comes-to-real-estate-sector-should-property/3239892.html

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