Housing is still a great place to put your
money
By Dr Larry Haverkamp
For most of us, it is the only way to get
rich slowly
Housing is back in the news with home sales and prices declining
again last month. Will the housing market ever bounce back?
An even bigger question is: Should you take advantage of the
doldrums and jump in now? After all, property has been a great
investment over the past 50 years, and it's likely to do well in
the next 50 as well.
There are four ways to play the market. First, you can buy a
home here in Singapore. Or you can invest overseas.
You could also forget about owning a flat and buy property
counters instead, like shares of Capital Land or CDL. Another type
of property stock is REITs. These are real estate investment trusts
which keep their preferential tax status by paying out 90 per cent
of their earnings in dividends. They have done well.
I'll focus today on what's most popular: Buying your own
home.
Has it been a good long-term investment? A lot is riding on the
answer since we have the world's highest home ownership with 96 per
cent of Singapore households owning a home.
Should you be a homeowner? And if you are already, should you
upgrade? I'd say "yes" to both. It's true that home prices could
fall a couple per cent more, but who knows? Short-term forecasts of
the property market are almost as unreliable as the stock
market.
If we have hit bottom and you wait, you'll lose out. The best
approach may be to focus on the long-run and forget about trying to
catch the bottom.
How much can you earn?
The big picture looks like this: In the long run - like over 50
years - the return on real estate has averaged just over 6 per cent
per year.
That is only the return on assets. More relevant is the return
on your own money, called return on equity. It's higher because you
borrow money to buy a home, and the 80 or 90 per cent you borrow
boosts the 6 per cent return on assets to a 10 per cent return on
equity. Hey, that's more like it!
It doesn't stop there. We should also add "imputed rent", which
is how much you'll save as a home owner because you don't need to
rent. This boosts returns much higher but to be conservative, let
focus on the 10 per cent return on equity, which also comes with
low risk.
Low risk? Yes, it's because you hold a home for many years and
that greatly increases the likelihood of actually getting the 10
per return.
In fact, a home is the only place where a person with limited
wealth can finance an investment like the big boys - with an 80 per
cent loan (from a bank) or a 90 per cent loan (from HDB) over a
very long time (25 years) and at low interest rates of only 2 or 3
per cent.
For example, you can make a downpayment of only $30,000 from
cash or your CPF to purchase a $300,000 four-room flat with an HDB
loan. If the price appreciates by 6 per cent per year, the value of
your flat will grow to $1.3 million in 25 years.
It sounds like a lot of money because it is, and you were able
to earn that much because you held for the long-run.
The lesson: Housing is hard to beat. There is no other
investment that allows a person of modest means to make a big
investment at a low cost and with a good chance of long-term
appreciation.
FAQ on home loans
By Dr Larry Haverkamp
Q: Are higher home prices really a sure
thing?
A: In the long-run they could
be but our instinct is to focus on the short-run where it is harder
to see the future. Here is a story that shows how hard it is even
for the experts to predict what lies ahead.
In 2005, the US Central Bank Chairman, Ben Bernanke, was asked
if US housing prices could come down. He said: "... it's a pretty
unlikely possibility, we have never had a decline in housing prices
on a nationalwide basis."
He was right. US home prices had never declined year-on-year
since the American revolution in 1776.
Two years later, in July 2007, Chairman Bernanke and the rest of
the nation got a surprise when US home prices began a
four-year-decline. Prices fell by one-third and pitched the world
into the worst recession it has seen since the Great Depression of
1929.
Since then, US home prices have shown their resilience and the
housing market is nearly back to its former highs.
Q: How about Singapore real
estate?
A: While the long-run looks
good, new housing regulations are taking a bite in the
short-run.
For example, we have a seller's stamp duty of up to five per
cent if you sell within five years and an additional buyer's stamp
duty (ABSD) if you buy a first, second or third home. It's a tax of
0 to 15 per cent, depending on whether you are a Singaporean,
permanent resident resident or foreigner.
Q: What else is holding back the housing
market?
A: There are new lending
restrictions, like the MSR (Mortgage Service Ratio). It is
calculated as your home loan payments divided by your gross income.
Banks and HDB won't make a loan that pushes MSR to over 30 per
cent.
A similar brake on lending is TDSR (Total Debt Service Ratio),
which applies to bank loans. It sets a maximum ratio of 60 per cent
for monthly total debt payments divided by gross income. It keeps
people from taking on too much debt but that also restricts
property purchases.
Q: Are lower housing prices a good
thing?
A: It depends on your
perspective. If you are a home owner, you probably want to see your
investment appreciate, so you prefer higher prices. If you're not,
you would want lower prices so that you can buy more cheaply.
For the economy as a whole, it is better to prevent a housing
bubble and guard against an economic collapse, as happened when US
home prices tumbled in 2008. That brought on the great recession
which spread worldwide, and would likely have caused a depression
if government had not acted.
The lesson was to let the air out of housing bubbles gradually
and better still, do it before the bubble forms, which is the
intent of the new housing rules.
"Buy
land, they're not making it anymore."
Mark Twain (1835-1910), American author
and humourist
Dr Larry Haverkamp is an economist and
adjunct faculty member at Singapore Management
University.
Top Property Special, The Straits Times, Saturday, July 19,
2014, Pg 1 & Pg 4
