Saturday, 26 January 2013

End of love affair with property?

Not quite, when the dream of living in one home and renting out another will persist. That's because CPF rules favour property purchases, and Singapore's status as a booming city undergirds prices.
By Ignatius Low, The Straits Times, 24 Jan 2013

WHEN the latest round of property cooling measures was announced two Fridays ago, I swear I could hear a faint hissing across the island.

It wasn't the sound of property agents collectively expressing their annoyance, or even the sound of air starting to escape from the inflated property market. To me, it was the sound of the simultaneous extinguishing of a dream that lives in the hearts and minds of tens of thousands of Singaporeans.

That dream is to be rich enough to invest in a second property, to be a landlord and have a tenant pay rent.

And then have that rental income be the first step in achieving the ultimate fantasy in this time-starved, stressed-out nation: to stop work, play golf or go to the spa all day, and collect rental streams coalescing into a steady gurgle of passive income that is the envy of relatives and friends.

For those who actually have the capital to embark on such a journey, 2013 has started on a frustrating note.

Want to invest in a condo unit? Now you have to put down 25 per cent cash, not 10 per cent like before. Another change means you can only take a maximum 50 per cent bank loan.

And even if you had all that cash lying around, a new stamp duty rule means you are 7 per cent in the red even before you have left the starting line.

Meanwhile, the Government has roadblocked investments in industrial property, the "it" investment of the last couple of years. Flip an industrial property too quickly now and you get taxed - up to a whopping 15 per cent.

By some accounts, the rule changes have had a chilling effect on Singapore investors.

A consumer banking head told me last week that when his bank holds its yearly forum for premier customers, his staff are usually peppered with questions about the property market. Last week, there were hardly any.

It is a sign of the times. This year, people receiving annual bonuses and seeking investment options have been left wandering around like zombies, rudderless and muttering about near-zero per cent deposit rates.

Some are rushing to take a bite of anything in the property market that looks remotely investible.

A recent launch of riverside residential units near the soon-to-be-refurbished Battersea Power Station in London was reportedly sold out in one weekend.

A friend who went to the launch told me it was like a fish market. Never mind that the area the development is in - Nine Elms - is largely industrial land that will take a few years to realise its potential.

This week, there were reports of a massive queue to buy shop units in Alexandra Road. With curbs on both the residential and industrial sectors, people are turning to the only sector left without curbs - commercial and office space.

These scenes of chaos make me wonder if the Government can ever really have the right policy tools to flog this crazy property addiction out of the Singapore investor. Is it a lost cause?

One problem is simply that property is one of the easiest investments to understand. But there are other reasons for this addiction that are more structural in nature, and these will take considerable time and effort to undo.

The Central Provident Fund (CPF) system in Singapore, for example, has long biased investors towards property.

CPF savings constitute a big proportion of the average middle-class investor's investment capital, and the rules are set up in such a way that CPF savings can be withdrawn relatively easily to buy property.

This has been a basic building block of the Government's hugely successful home ownership drive, of course, but the same easy rules apply even if the withdrawals are not for property ownership but for property investment.

CPF savings can be used to pay mortgage instalments, but rental returns can be pocketed as cash. Any capital gain can also be pocketed as cash - minus only the interest payable on CPF amounts withdrawn.

So for many investors, a property investment offers the perfect opportunity to "withdraw" savings from one's CPF account before retirement.

On the other hand, CPF rules dictate that the returns on investments in stocks and other financial instruments - whether dividends or capital gains - have to go back into the CPF account, to be locked up until retirement.

There are also stricter caps on withdrawals for investments in stocks and gold, for example. As a result, many see an investment in property as far superior in the short term.

But what about the long term?

Here, the other big "structural" factor feeding property addiction comes into play. It has to do with Singapore's ascent to First World status in the last three or four decades.

As the country became a more and more attractive place for foreigners to live and work in, the property market reaped the benefits. And Singapore is also physically a small city state, with limited land.

So while, yes, there have been ups and downs, people from every age group generally have a happy story to tell about how well their property investments have fared. The Sunday Invest section of this newspaper is full of them. In a way, they made the right bet on their home market and invested in its success.

I remember, as a young officer starting work in the civil service in the late 1990s, berating my parents for investing in a two-bedroom leasehold condo unit in Bukit Panjang shortly before the 1997 Asian financial crisis.

The timing could not have been worse. They were more than one-third underwater then and struggling to hold on to their tenant, who was paying just $1,000 a month in rent.

I told them that they should have invested their CPF savings in a portfolio of professionally managed unit trusts assembled by a trained financial planner, as I had done.

More than 15 years later, they are sitting on a capital gain of over 50 per cent, plus all the rental income they received more or less uninterrupted.

And me? Let's just say I think twice these days about reminding them of my views.

Unless the CPF rules change, or the country itself goes through a Japan-style period of economic stagnation, investors in Singapore will continue to hold on to their dream and the property addiction will never go away.

I dare say that even in the current climate, people will find a way around the rules.

Perhaps 2013 will see the start of investors inking agreements to share and buy a property, just as they did during the luxury property boom five years ago.

The question for policymakers is whether there is anything fundamentally wrong with this.

Yes, there is a real risk that property investors are exposed to economic downturns that could cause prices and rentals to suddenly crash. Interest rates could go up sharply and render them unable to service their mortgages.

Speculative buying in the market should also be weeded out every now and then so that the property "flippers" don't chase prices up for their own sake and hurt the genuine investor in the process.

But while policymakers need to act, it is ultimately a question of balance and degree.

It is one thing to stamp out imprudent behaviour, and the political heat may be on now to stop the seemingly inexorable rise in property prices.

But should rule changes go so far as to have the effect of forcing investors to disfavour one asset class over another?

One can only hope that Singapore's property-mad investors are being given the appropriate advice on the alternative property and financial investments that they might be channelling their money into.

And that there will be more happy stories to tell in the years to come.

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