Analysis on Singapore Government's latest Property Cooling Measures - Breaking Even

In part 1, I analysed based on holding for a 1 year time frame. Let me turn it around to make it useful for those who are thinking of buying a property now. 

Cost	$1,000,000
Interest Rates	1%	2%	3%	4%	5%	6%	7%	8%
Increase % to breakeven	15.46%	16.06%	16.66%	17.26%	17.86%	18.46%	19.06%	19.66%
Actual $ Increase to breakeven	$154,600	$160,600	$166,600	$172,600	$178,600	$184,600	$190,600	$196,600
Breakeven Selling Price	$1,154,600	$1,160,600	$1,166,600	$1,172,600	$1,178,600	$1,184,600	$1,190,600	$1,196,600

Based on my calculations, if you want to buy a property now and you are thinking of flipping within 1 year, you will need a price appreciation of 15.46% if interest remains low at 1% and 19.66% if interest were to surge to 8%.

Even if the measures doesn't work, i.e. prices increases again after stagnating for a few months, will it rise by 15.46%?  I think not.  The measures by Singapore is more stringent than Hong Kong's.  It simply does not make sense right now for me to buy, not when the government has promised to add measures if the current measures fail. 

Anyway, I invest in stock market and whenever the volume slides, the price will slide too.  The same applies to property.  My parents' HDB was selling for $600k during the 97 peak.  It dropped to around $360k at around 2002 after stagnating for a few years.  Currently, a similar unit just sold for $680k.  Hence, it is not uncommon to see a 40% drop in price.

I must be patient.

Analysis on Singapore Government's latest Property Cooling Measures

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!!

Why property is a good investment tool?

Why is property a good investment tool?  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%

Let's now look at some calculations showing why property investment is a good investment tool and why many Singaporeans are hooked onto chasing this property bubble.  The above assumption is based on you buying a property for $1m and reselling it for $1.2m.  This looks like you can earn a cool $200k profit in a rising market.  However astute investors may ask what is the big deal of 20% profit?  Question is, is it really just a 20% profit?  Let's delve further... 

	10%	20%	30%	40%	50%
Downpayment	$100,000	$200,000	$300,000	$400,000	$500,000
Loan Amount	$900,000	$800,000	$700,000	$600,000	$500,000
Stamp Duty	$24,600	$24,600	$24,600	$24,600	$24,600
Total Initial Outlay	$124,600	$224,600	$324,600	$424,600	$524,600
Interest Cost (1yr)	$9,000	$8,000	$7,000	$6,000	$5,000
PMT	$2,894.76	$2,573.12	$2,251.48	$1,929.84	$1,608.20
Total Outlay	$124,600	$224,600	$324,600	$424,600	$524,600
Profit	$202,400	$203,400	$204,400	$205,400	$206,400
Rate of Return	162.44%	90.56%	62.97%	48.37%	39.34%

Looking at the chart above (which assumes that the property is sold after 1 year), the rate of return depends greatly on the downpayment....bringing us to the greatest part of property investment.... LEVERAGE.

If you can leverage on a 90% loan, the profit is a cool 162%.  Of course, when you leverage less, the rate of return drops correspondingly.  However, do note that I am using 1% interest rate which to me is relatively low in the long run.  For flippers (which I am not), the interest rate is not really a concern as they will be selling in the short term, i.e. little impact due to the short term of loan.  However, when interest goes up, it will be a lot harder to sell the property.  Here's why....

	10%	20%	30%	40%	50%
Downpayment	$100,000	$200,000	$300,000	$400,000	$500,000
Loan Amount	$900,000	$800,000	$700,000	$600,000	$500,000
Stamp Duty	$24,600	$24,600	$24,600	$24,600	$24,600
Total Initial Outlay	$124,600	$224,600	$324,600	$424,600	$524,600
Interest Cost (1yr)	$36,000	$32,000	$28,000	$24,000	$20,000
PMT	$4,296.74	$3,819.32	$3,341.91	$2,864.49	$2,387.08
Total Outlay	$124,600	$224,600	$324,600	$424,600	$524,600
Profit	$175,400	$179,400	$183,400	$187,400	$191,400
Rate of Return	140.77%	79.88%	56.50%	44.14%	36.48%

The above is based on 4% interest rate which is very possible in the mid term.  As you can see, the rate of return drops by as much as 22% for 90% leverage but it is still relatively attractive (as the flipper sells within 1 year).  However, it is no longer as attractive to buy the property.  At 1%, the monthly payment is $2895, meaning that if he can loan out at $3k, the property is self-financing.  However at 4%, it is now $4297, i.e. the new owner will have to cough up at least $1300 more.  At 8%, this figure goes up to a whopping $6604, way beyond what most investors can afford or are willing to pay.