Many folks have been asking, with prices so high is it still a good time to buy? Actually, 'it is not when you buy but when you sell that makes the difference'. Wow! So true. The following are five reasons why it still makes sense to invest in property.
1. Low interest rates
Even with a higher downpayment required currently, if the price is right, people will still invest due to the low interest rates – which are as low as 0.88% – to leverage a passive income from their property. The returns can be more than what a fixed deposit account can offer.
For example, a unit at Southbank costing about $1.2 million can generate a rental income of about $4,800 per month, while the mortgage is about $3,000. The buyer would enjoy a passive income of $1,800 per month, as compared to depositing his capital in a fixed deposit to get 0.4% interest or around $1,000 per year.
2. Property is an appreciating asset (eventually)
Barring any dramatic economic upheavals, property prices will likely stabilize or slowly increase in 2011. Most sellers will not want to sell at a lower price today, and are not under pressure from a large mortgage due to low borrowing costs. The new 40% down payment rule will actually act as an incentive because buyers, having come up with this capital, will not want to sell.
Provided you do not sell your property during the downturn – as you will inevitably lose money on it – the value should increase. The key is that the buyer must have holding power if the market deteriorates, and should not buy unless they have the holding power to weather any market condition. Prices will eventually rise again as we witnessed in 2008, when prices declined but eventually rose to, and in some cases surpassed, the 2007 peak.
3. Hard assets are better than paper assets
Many people choose to purchase an asset like property because of the asset’s enduring value, even during a financial crisis. People feel safer putting their money in a real asset rather than in financial instruments, as your real asset will always be there, even when market conditions are not good.
4. Market conditions don’t matter for the long term investor
Buyers who are looking at property as a long-term investment are less concerned about the market’s short term movements. Property in Singapore will most likely appreciate in the long term due to the scarcity of land. While having a diversified portfolio is a good thing, as a long-term investment, property is generally going to make more money than other instruments. Investing in bonds, for example, is a safe investment, but your capital appreciation will be limited.
But property is not the ideal instrument for speculators. Not only has the government introduced measures to discourage property speculation, but you will be much more vulnerable to market fluctuations.
5. A property keeps on giving
Buying public housing in today’s market is not cheap, with HDB executive condominiums going at around $650 to 700 psf, close to mass market private property prices. A HUDC unit has already reached the $1 million mark, and the trend looks set to continue. Parents may see buying a property not only as a hedge against inflation, but also as an inheritance for their children. If home prices continue to rise, and with the cost of construction materials inevitably rising too, there is fear that the younger generation could be priced out.
As for selling, I would think that if you have a reasonable profit and a better investment opportunity arises, that would be the right time to sell. Most owners will not sell today because of low interest rates as most of them are enjoying good passive income from owning the unit.
One favourite quote is: “It is not when you buy but when you sell that makes the difference to your profit.”