We are currently at the peak of the Singapore property cycle since 1965, with residential property prices at an all-time high. Despite the sky-high prices, there are no shortages of investors snapping up local properties. These investors are now paying for prices many years ahead, making it near impossible to have decent investment returns. Many are still buying and hoping to cash out the capital gains on their properties within the next 3-5 years. So, are these buyers investing or are they gambling?
Every time I see long queues of people buying Toto (a legalized form of lottery in Singapore), I always wonder why these gamblers prefer to “throw” away their money instead of saving it to invest for their future. These lottery buyers, aspiring to be wealthy, must have believed that lottery offers them the best chance of becoming rich. I asked an ex-colleague (who regularly bets on Toto) what makes him want to gamble. You know what? He told me that Toto is a form of investment and he is convinced that one day he would strike it rich! He probably doesn’t know that the chance of him getting all the 6 digits right for Toto is much slimmer than him getting struck by lightning!
I find striking similarities between people queuing up at Toto booths to buy lotteries and people queuing up at property launches to buy properties in today’s market. Many self-proclaimed property investors are no more than gamblers actually. Why? Because they don't research the market and do the necessary homework before investing. Some investors merely follow the herds or listen to recommendations by real estate agents. Others use the "buy and hope" strategy – buy properties and hope that someone would soon offer a higher price for their properties, or hope that the value of their properties would appreciate in the future. Many investors don't even have the means to hold on to the properties for a longer period of time to realize the potential capital gains. They become gamblers playing a property game of chance. Therefore, what’s the difference between such investors and gamblers where luck is required to profit from any monetary gains?
After doing my research and calculations for price versus rental on the current Singapore’s residential property market, I come to a conclusion that most properties are providing investors with negative yields. For rare cases where condominiums are earning positive cash flows for investors, yield is only about 2-3% which could hardly cover inflation! Bear in mind that my calculations are based on current low interest rate. Do you think that today's low interest rate environment would continue indefinitely? Of course not! It's not a matter of whether interest rate will go up but when it will go up. In my opinion, the increase in interest rate could happen soon. What kind of investment is this when an investor can't make much money and may even lose much in the near future? Might as well keep the money in the bank!
As for me, I'll be staying away from the Singapore property market in the meantime while expanding my overseas property portfolio. I've yet to find another compelling property deal in Singapore since my last property transaction done in late October 2010 for a condominium in West Coast. This 3-bedroom condominium, costing me under a million dollar, has been fetching me a rental yield of 5.5%. On top of that, the property value has appreciated by more than 50%! Until I find local properties ideal for investors again, I shall continue my property investing outside Singapore.
When you invest in a property, do so for rental income that could provide recurring positive cash flow. People who invest in properties only to hope for a gain on future capital appreciation would make them gamblers. You need to be extremely careful when investing in a property due to high capital involvement. Read more books and understand the property market in order to be a proficient property investor. Always do your homework and research the market extensively prior to purchasing a property.
Each time you invest, remind yourself of this quote by Warren Buffett:
Rule No. 1: Never lose money
Rule No. 2: Never forget Rule No. 1
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