Sunday, July 26, 2009

Mum and dad's tips for home buyers

Parents may not be property experts but their advice is sound in a commonsensical way, so here are their tips for first-time buyers

The current property boom reminds me of the time I bought my apartment about seven years ago. The year was 2002 and the Government had relaxed one key regulation concerning property purchases.

Instead of having to put down a 20 per cent cash down payment on a home, buyers now needed to come up with only 10 per cent cash, and could take the rest of the down payment from their CPF savings.

It was a major change for young working adults like me who had worked for a few years and accumulated some savings, but not enough to comfortably stump up say, $100,000 on a $500,000 home.

Suddenly, smaller and reasonably priced apartments appeared on my horizon. My job prospects seemed certain, so I went house-hunting with my parents in tow. A few weeks later, I had signed on the dotted line and was preparing to move into my new studio apartment.

When the rule changed in 2002, I met many first-time buyers like me at showflats around the island. Some were scouting for a good investment with good rental yield, but many were singles or young couples who were looking for a place to live.

Many in the latter category were already renting apartments, which was a drain on their monthly cashflow. Buying made sense because they would be freed from paying rent and could withdraw from their CPF savings instead to pay the monthly loan instalments.

These are the sorts of reasons for buying that I am hearing now from my friends and colleagues, many of whom are also house-hunting.

The property boom in 2006 and 2007 had passed them by. Many apartments launched were huge and located in prime areas, costing at least $1.5 million.

If your budget was $500,000, the only way you could get in on the action was to take a gamble with some co-investors on a swanky District 9 four-bedder that you could never afford to live in.

Many ordinary working executives might have wanted to invest in property but didn't want to take that sort of gamble, so they stayed on the sidelines.

These people are out in droves this year, attracted by a good selection of smaller or more affordable suburban apartments. We are seeing more genuine demand from investor-occupiers.

Some friends and colleagues have asked me for my advice on buying property. I always tell them that I am no expert, though I can give them some arguments currently being propounded by analysts who are bullish or bearish on the market.

Bulls point to the fact that there is genuine demand from buyers who have money saved up from four good years of economic growth from 2004 to 2008. There will also be more foreigners in Singapore and they are both renting and buying homes.

They also say that the problem of oversupply in the market has been reduced by developers delaying some launches and that when these homes come onstream in 2011 or later, an economic recovery will have taken hold to cushion the blow.

Property bears will tell you that prices haven't fallen very much from the peak and are still way above the last trough.

The oversupply of homes (there are more than 60,000 units in the pipeline) may have been postponed, but will still need to work its way through the system. An economic recovery is starting, but will be weak for a number of years.

After presenting both sides of the argument, I warn them that all these macro factors are notoriously unreliable in any case.

Very few analysts or economists predicted the strength of the current property boom, which saw the highest number of homes on record sold last month. Who is to say they will do any better going forward?

For people who have decided to take the plunge, I pull out the things my parents told me when I first started to look for a house. They are not experts either, but they have had more experience with buying property and have been through more boom and bust cycles than me.

I found the advice to be sound in a commonsensical way, so I repeat it to people who ask me about buying property.

The first principle that my parents taught me was that as a first-time buyer, I should never buy any apartment priced above $1,000 per sq ft (psf). In their minds, these prices were paid only by 'rich people' or 'big investors'.

Of course, times have changed. When they were buying property, $1,400 psf could get you a flat in Cairnhill. Now we are talking about Novena or Bukit Merah. But the $1,000 psf barrier is still an important one because it goes to the affordability of a home.

A two-bedroom apartment will be at least 900 sq ft. Going beyond $1,000 psf means that the apartment will cost a single buyer or a young couple about $1 million - which is quite a lot of debt to take on.

The second principle my parents taught me was to buy the cheaper of any two equally attractive apartments.

I remember deciding between two apartments which were quite close to each other. One was more glamorous and built by a big-name developer, the other was smaller and more modest-looking.

I could see myself being happy living in both apartments but the first one cost $200,000 more.

My dad asked me: 'If you can live with a smaller loan, why not?' At the time, I thought he was just being irritatingly conservative, but I took his advice nonetheless. I was glad for it months later when the interest rates on my home loan started to rise with the economic boom.

Finally, the third piece of advice: Location, location, location. First-time buyers are very unlikely to live in a flat they have bought for the rest of their lives, so the ability to resell it is key.

Many older-generation Singaporeans will tell you that if you can see HDB public housing flats from the window of a condo unit, don't touch it with a 10ft pole because other buyers won't either.

I wouldn't agree with that sort of thinking any more, but what I do take away from that is the principle that plenty of other people must also see value in the house you are buying.

My own view is that homes that are within walking distance of an MRT station will remain the most saleable for the future.

With the expansion of Singapore's rail network, particularly within the city and other office hubs islandwide, more and more executives - local or foreign - will be able to take the train to work.

Of course, one must keep an eye on overall travel times, such as distance from the city centre and whether there is a need to change lines.

But in general, as long as the train arrives at one's doorstep, does it really matter if the flat is located in the heartland amid other HDB flats?

So there, you have my recommendation for first-time buyers: flats under $1,000 psf, located next to an MRT station and costing significantly under $1 million.

Do they exist? You bet they do. Happy hunting!

Selling point
First-time buyers are very unlikely to live in a flat they have bought for the rest of their lives, so the ability to resell it is key.

Source: Sunday Times, 26 July 2009

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