Sunday, April 19, 2015

My House Hunt so far

This post stumbled into my radar when I was surfing the internet. Although it is a very short post, I think it is very sweet and concise. However, it did remind me about what I have NOT been doing, which I should be doing very soon.

I did read Property Soul's book, which I am very glad that I did. I feel a lot more knowledgeable and a lot more skeptical about the Singapore real estate market now. I think it's always better to be a skeptic when encountering something that you don't really know much about at first. Just smile and nod until you figure out what is happening, but be aware and observe closely.

I have been keeping rather close tabs on the property projects that I am interested in. I just saw a recent transaction that seems to be defying the trend of the market and it is an increase in price compared to the last unit sold.

Taking into account the market rate rental, really lowballing monthly condo fees, his return based on his buying price should come in at 4% gross. I would imagine that someone with that profile (buying a small property and paying premium over market) would be an investor and not a home buyer. Using a low tax rate of 7%, his "net" return should be 3.7%. In reality, it would definitely be lower especially if any maintenance is needed. Take into account that I'm not counting any utilities fees at all. Throw those in and we'll see expenses go up by at least $150 and net returns might be just sitting over 3%.

A close confidant that I speak to regarding my house hunting told me that it is such a waste that the unit I have been watching got snapped up. However, thinking to myself, do I really want to buy a property that yields 3.7%? That is also the upper end estimate. The lower end estimate comes in at about 3.3%. Is that a good price to pay for a property?

I don't really think so. 3.7% means that it will take me 27 years to recover my capital. I'm actually aiming to snag something of at the very least 5% gross, which obviously does not exist in today's market.

However, if you compare to other properties in Singapore where the gross return is just over 3%, you're looking at slightly over 2.5% in terms of actual real returns. The other project that I was initially eying is yielding gross 3.2% and estimated net 2.6% on the high end. And this is calculated with the last price transacted, which is the lowest transacted price in the past 3 years.

From the data that I am looking, it is painting a conflicting picture. Projects setting new lows are still lower yielding than some projects which are setting new highs. Are some areas overvalued, while others are seen as undervalued? Perhaps the Singaporean property investor is looking at net yields of 3%, so anything over is cheap, and anything under is expensive.

My feeling of the general market sense is that, "pffft, all the naysayers about housing prices correcting and interest rates rising are all bullshit". There has been renewed volume as well as decent pricing in the recent launches as seen at Kingsford Waterbay, Sims Urban Oasis and Northpark Residences.

However, I still don't think that the worst is over yet. More supply will hit the market. Rental remain extremely muted. Interest rates have spiked (but correctly slightly) and we are moving closer to a possibility of interest rates moving up due to the Federal Reserve. Personally, I think that rising interest rates are a hugely overblown talking point about property. It affects the marginal homeowner, which meant they were overleveraged anyway. Building up a sensitivity analysis that takes into account that short term rates before adding bank spreads can hit up to 2.5% is not something crazy to do in my opinion.

Anyway, my personal point of view is that the Federal Reserve will not be able to raise rates to their normalization goal, not even close. I think they will raise rates, the world will freak the shit out, forcing them to plunge back to the zero bound. Rising rates followed by market hysteria could be a good catalyst that prompts the correction in housing prices, as well as correction in other assets.

Back to me though. I will continue to maintain a watchful eye on the projects that are on my list. I will slowly but surely finish the RES notes that my friend gave to me. I am hoping that with all my distractions and super happening social life, I can finish my readings by mid May. After that, I hope that I can finish my tail end of my property research and come up with a nice clean process to buy a house, with all the details jotted down.

My expectations for a correction is H2 2015 and I think an opportunity could arise as early as H1 2016. Pure, unadulterated, unsubstantiated, wild speculations.

Listen to 25 year olds talk about properties at your own damn risk.

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