After the introduction of the latest cooling measures on 13 Jan 2011, can I still buy a property for investment? The answer is yes, if I were to sell of my HDB and realise the profit. If not, I will have to save again for the additional 10% of downpayment. However, that is not important any more. The important question right now is.."Should I even buy a property now?"
In order to answer this question, I am making the following assumptions for the model:
| Cost/Valuation | $1,000,000 | |
| Sell | $1,200,000 | |
| Profit | $200,000 | 20.00% |
| Interest Rate | 1.00% | |
| Years | 30 | |
| Rental | $3,000 | 3.6% |
The key changes are the Seller Stamp Duty (SSD) and the 60% loan to valuation (LTV) for 2nd property as compared to 70% LTV previously. The LTV for non-individual is now capped at 50% only! Why are all these important? Read on...
| SSD | ||
| Year 1 (16%) | 16% | $160,000 |
| Year 2 (12%) | 12% | $120,000 |
| Year 3 (8%) | 8% | $80,000 |
| Year 4 (4%) | 4% | $40,000 |
| Year 5 | 0% | $0 |
I am using the same chart to explain why I believe that this time round, the government's cooling measures will work. Let's see the before and after...first before
| 20% | 30% | |
| Downpayment | $200,000 | $300,000 |
| Loan Amount | $800,000 | $700,000 |
| Stamp Duty | $24,600 | $24,600 |
| Total Initial Outlay | $224,600 | $324,600 |
| Interest Cost (1yr) | $8,000 | $7,000 |
| SSD | $30,000 | $30,000 |
| PMT | $2,573.12 | $2,251.48 |
| Total Outlay | $254,600 | $354,600 |
| Profit | $173,400 | $174,400 |
| Rate of Return | 68.11% | 49.18% |
Based on the above chart, you can still earn a decent 49% if you sell in 1 year, assuming property prices climb 20%. What about after the implementation?
| 20% | 30% | 40% | 50% | |
| Downpayment | $200,000 | $300,000 | $400,000 | $500,000 |
| Loan Amount | $800,000 | $700,000 | $600,000 | $500,000 |
| Stamp Duty | $24,600 | $24,600 | $24,600 | $24,600 |
| Total Initial Outlay | $224,600 | $324,600 | $424,600 | $524,600 |
| Profit just b4 1 Yr | $43,400 | $44,400 | $45,400 | $46,400 |
| Total Outlay | $224,600 | $324,600 | $424,600 | $524,600 |
| Rate of Return | 19.32% | 13.68% | 10.69% | 8.84% |
Sell off HDB to buy Condo?
The return of return for 80% LTV has dropped from 68% to just 19%. This is a very low rate and furthermore is based on the assumption that there is yet another 20% upside within 1 year even with the latest cooling measures. I think this is really optimistic. Furthermore, we are looking are a monthly rental of $3k for this 19% and a low interest rate of 1% for this to happen. If interest goes to 4%, the rate of return drops to 8.64% and at 8%, the seller will suffer a loss of 5.6% even if he manage to sell at $200k profit!!! I fail to see what upside there is with this kind of figures!!! In other words, price must drop!! Hence, I will not be selling my HDB now to buy a condo as it is totally senseless to do so!!
Buy Condo as 2nd Property?
Now, what about if I were to purchase the condo as the 2nd property? This means that I can only loan 60%. Even with a rise in prise of 20% from current price, the rate of return is a miserable 10.7%, and at 1% interest rate!! At 4%, the figure goes to 6.45% and at 8%, the rate of return is only 0.80%. Remember, this is even with a price hike of 20%!! I must be crazy to buy a condo right now with this kind of measures!
Thoughts to myself
It does not make sense to buy any property now. It is no longer a question of whether property prices will drop. The question now is when is the right time to buy in? Maybe when I have time, I will further my calculations to work it out. But it is no longer urgent, as the prices will slowly, but surely, slip. Time is now working on my favour. Prices will drop, interest will be low. So what should I do now? Focus back on my shares investment!!
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