End of love affair with property?

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#1
The Straits Times
www.straitstimes.com
Published on Jan 24, 2013
EYE ON SINGAPORE
End of love affair with property?

Not quite, when the dream of living in one home and renting out another will persist. That's because CPF rules favour property purchases, and Singapore's status as a booming city undergirds prices.

By Ignatius Low News Editor

WHEN the latest round of property cooling measures was announced two Fridays ago, I swear I could hear a faint hissing across the island.

It wasn't the sound of property agents collectively expressing their annoyance, or even the sound of air starting to escape from the inflated property market. To me, it was the sound of the simultaneous extinguishing of a dream that lives in the hearts and minds of tens of thousands of Singaporeans.

That dream is to be rich enough to invest in a second property, to be a landlord and have a tenant pay rent.

And then have that rental income be the first step in achieving the ultimate fantasy in this time-starved, stressed-out nation: to stop work, play golf or go to the spa all day, and collect rental streams coalescing into a steady gurgle of passive income that is the envy of relatives and friends.

For those who actually have the capital to embark on such a journey, 2013 has started on a frustrating note.

Want to invest in a condo unit? Now you have to put down 25 per cent cash, not 10 per cent like before. Another change means you can only take a maximum 50 per cent bank loan.

And even if you had all that cash lying around, a new stamp duty rule means you are 7 per cent in the red even before you have left the starting line.

Meanwhile, the Government has roadblocked investments in industrial property, the "it" investment of the last couple of years. Flip an industrial property too quickly now and you get taxed - up to a whopping 15 per cent.

By some accounts, the rule changes have had a chilling effect on Singapore investors.

A consumer banking head told me last week that when his bank holds its yearly forum for premier customers, his staff are usually peppered with questions about the property market. Last week, there were hardly any.

It is a sign of the times. This year, people receiving annual bonuses and seeking investment options have been left wandering around like zombies, rudderless and muttering about near-zero per cent deposit rates.

Some are rushing to take a bite of anything in the property market that looks remotely investible.

A recent launch of riverside residential units near the soon-to-be-refurbished Battersea Power Station in London was reportedly sold out in one weekend.

A friend who went to the launch told me it was like a fish market. Never mind that the area the development is in - Nine Elms - is largely industrial land that will take a few years to realise its potential.

This week, there were reports of a massive queue to buy shop units in Alexandra Road. With curbs on both the residential and industrial sectors, people are turning to the only sector left without curbs - commercial and office space.

These scenes of chaos make me wonder if the Government can ever really have the right policy tools to flog this crazy property addiction out of the Singapore investor. Is it a lost cause?

One problem is simply that property is one of the easiest investments to understand. But there are other reasons for this addiction that are more structural in nature, and these will take considerable time and effort to undo.

The Central Provident Fund (CPF) system in Singapore, for example, has long biased investors towards property.

CPF savings constitute a big proportion of the average middle-class investor's investment capital, and the rules are set up in such a way that CPF savings can be withdrawn relatively easily to buy property.

This has been a basic building block of the Government's hugely successful home ownership drive, of course, but the same easy rules apply even if the withdrawals are not for property ownership but for property investment.

CPF savings can be used to pay mortgage instalments, but rental returns can be pocketed as cash. Any capital gain can also be pocketed as cash - minus only the interest payable on CPF amounts withdrawn.

So for many investors, a property investment offers the perfect opportunity to "withdraw" savings from one's CPF account before retirement.

On the other hand, CPF rules dictate that the returns on investments in stocks and other financial instruments - whether dividends or capital gains - have to go back into the CPF account, to be locked up until retirement.

There are also stricter caps on withdrawals for investments in stocks and gold, for example. As a result, many see an investment in property as far superior in the short term.

But what about the long term?

Here, the other big "structural" factor feeding property addiction comes into play. It has to do with Singapore's ascent to First World status in the last three or four decades.

As the country became a more and more attractive place for foreigners to live and work in, the property market reaped the benefits. And Singapore is also physically a small city state, with limited land.

So while, yes, there have been ups and downs, people from every age group generally have a happy story to tell about how well their property investments have fared. The Sunday Invest section of this newspaper is full of them. In a way, they made the right bet on their home market and invested in its success.

I remember, as a young officer starting work in the civil service in the late 1990s, berating my parents for investing in a two-bedroom leasehold condo unit in Bukit Panjang shortly before the 1997 Asian financial crisis.

The timing could not have been worse. They were more than one-third underwater then and struggling to hold on to their tenant, who was paying just $1,000 a month in rent.

I told them that they should have invested their CPF savings in a portfolio of professionally managed unit trusts assembled by a trained financial planner, as I had done.

More than 15 years later, they are sitting on a capital gain of over 50 per cent, plus all the rental income they received more or less uninterrupted.

And me? Let's just say I think twice these days about reminding them of my views.

Unless the CPF rules change, or the country itself goes through a Japan-style period of economic stagnation, investors in Singapore will continue to hold on to their dream and the property addiction will never go away.

I dare say that even in the current climate, people will find a way around the rules.

Perhaps 2013 will see the start of investors inking agreements to share and buy a property, just as they did during the luxury property boom five years ago.

The question for policymakers is whether there is anything fundamentally wrong with this.

Yes, there is a real risk that property investors are exposed to economic downturns that could cause prices and rentals to suddenly crash. Interest rates could go up sharply and render them unable to service their mortgages.

Speculative buying in the market should also be weeded out every now and then so that the property "flippers" don't chase prices up for their own sake and hurt the genuine investor in the process.

But while policymakers need to act, it is ultimately a question of balance and degree.

It is one thing to stamp out imprudent behaviour, and the political heat may be on now to stop the seemingly inexorable rise in property prices.

But should rule changes go so far as to have the effect of forcing investors to disfavour one asset class over another?

One can only hope that Singapore's property-mad investors are being given the appropriate advice on the alternative property and financial investments that they might be channelling their money into.

And that there will be more happy stories to tell in the years to come.

ignatius@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#2
Make sense that this is the right time to slowly tweak back the CPF rules that Goh changed 2 decades ago. Then CPF can fulfil the original mission of providing for retirement rather than property investment.
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#3
(24-01-2013, 08:25 AM)specuvestor Wrote: Make sense that this is the right time to slowly tweak back the CPF rules that Goh changed 2 decades ago. Then CPF can fulfil the original mission of providing for retirement rather than property investment.

I think it would be difficult, if not impossible, to reverse the policies. There is now too much vested interest in investment property and the outcry would be humungous - the Govt will not risk a political backlash from tightening CPF policies as the public have now come to recognize such an easy money-making opportunity.
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#4
Quote:CPF savings can be used to pay mortgage instalments, but rental returns can be pocketed as cash. Any capital gain can also be pocketed as cash - minus only the interest payable on CPF amounts withdrawn.

So for many investors, a property investment offers the perfect opportunity to "withdraw" savings from one's CPF account before retirement.

On the other hand, CPF rules dictate that the returns on investments in stocks and other financial instruments - whether dividends or capital gains - have to go back into the CPF account, to be locked up until retirement.

Indeed, dumb CPF rules to "protect" dumber investors. Because of these dumbos, I can only invest 35% of my CPF in stocks. Tongue

Quote:I told them that they should have invested their CPF savings in a portfolio of professionally managed unit trusts assembled by a trained financial planner, as I had done.

More than 15 years later, they are sitting on a capital gain of over 50 per cent, plus all the rental income they received more or less uninterrupted.

And me? Let's just say I think twice these days about reminding them of my views.

See what I tell you about dumb investors. How could he qualify as a money editor (or ex) if he can't even get a proper return on stocks?
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#5
(24-01-2013, 09:30 AM)Musicwhiz Wrote:
(24-01-2013, 08:25 AM)specuvestor Wrote: Make sense that this is the right time to slowly tweak back the CPF rules that Goh changed 2 decades ago. Then CPF can fulfil the original mission of providing for retirement rather than property investment.

I think it would be difficult, if not impossible, to reverse the policies. There is now too much vested interest in investment property and the outcry would be humungous - the Govt will not risk a political backlash from tightening CPF policies as the public have now come to recognize such an easy money-making opportunity.

yes populist measures are hard to reverse but it is the right thing to do. It doesn't need to be big bang, it can be done in steps to reverse CPF use in mortgages. Just like it took 5 years to reduce withdrawal of CPF monies from 50% to zero. Over time it doesn't feel drastic Smile but it will help tremendously over the long term. It is time that people realise the lost decade under Goh's Singapore Inc policies.

"Indeed, dumb CPF rules to "protect" dumber investors. Because of these dumbos, I can only invest 35% of my CPF in stocks."

The rules are not dumb. People mistake social policies with profit MAXimisation, just like risk with returns (like now people associate properties with high return forgetting the high risk as it is 4X levered). CPF main purpose is to provide retirement CASH FLOWS, which you can't do if it is stuck with the necessary roof over the head. I think sophisticated investors should sign a simple declaration to invest in CPFIS instruments, if they want to forego the sure-win 2.5% interest.
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#6
35% of CPF in stocks is because govt role of CPF is to provide retirement savings. Giving a leeway of 100% will get many people who thinks they are Warren Buffet jr to invest fully and lose fully their savings as well.
Applies alot to retirees who love to dabble in stocks.

I think the 35% ruling is fine enough. Giving too much leeway will end up making alot of sorrowful investors rioting in Hong Lim Park during the next boom-bust cycle.

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#7
(24-01-2013, 11:06 AM)specuvestor Wrote:
(24-01-2013, 09:30 AM)Musicwhiz Wrote:
(24-01-2013, 08:25 AM)specuvestor Wrote: Make sense that this is the right time to slowly tweak back the CPF rules that Goh changed 2 decades ago. Then CPF can fulfil the original mission of providing for retirement rather than property investment.

I think it would be difficult, if not impossible, to reverse the policies. There is now too much vested interest in investment property and the outcry would be humungous - the Govt will not risk a political backlash from tightening CPF policies as the public have now come to recognize such an easy money-making opportunity.

yes populist measures are hard to reverse but it is the right thing to do. It doesn't need to be big bang, it can be done in steps to reverse CPF use in mortgages. Just like it took 5 years to reduce withdrawal of CPF monies from 50% to zero. Over time it doesn't feel drastic Smile but it will help tremendously over the long term. It is time that people realise the lost decade under Goh's Singapore Inc policies.

"Indeed, dumb CPF rules to "protect" dumber investors. Because of these dumbos, I can only invest 35% of my CPF in stocks."

The rules are not dumb. People mistake social policies with profit MAXimisation, just like risk with returns (like now people associate properties with high return forgetting the high risk as it is 4X levered). CPF main purpose is to provide retirement CASH FLOWS, which you can't do if it is stuck with the necessary roof over the head. I think sophisticated investors should sign a simple declaration to invest in CPFIS instruments, if they want to forego the sure-win 2.5% interest.

But now even a 3-room HDB flats cost 300K-350K (depend on location). So most ordinary married couple's combined earning of 2.5k-3.5k will find it hard to service the mortgage loan without touching CPF's fund. O. K. maybe they can. May i ask at what sacrifices they have to make? No wonder no baby's bonus can entice ordinary wage earners to procreate.
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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#8
Buying a property can be classified as use for future retirement purpose. It has appreciation and home elements.
I do not think it makes sense to roll back. The problem we have today is the ultra low interest rates.

Just my Diary
corylogics.blogspot.com/


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#9
Quote:So most ordinary married couple's combined earning of 2.5k-3.5k will find it hard to service the mortgage loan without touching CPF's fund.
These couples are not ordinary. They are considered low income.

http://www.mom.gov.sg/statistics-publica...wages.aspx
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#10
Can CPF be used for second ppty? If yes, perhaps can consider restrictions on second ppty similar to those for investments in UT and stocks, e.g. rental income to be put back in CPF account. Since second ppty is considered an investment.
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