The Singapore property market holds great promise for every homebuyer. For young Singaporeans, it means the opportunity to acquire their own home. The country’s wealthier residents purchase second and third properties to provide them with a tangible asset that can generate a steady stream of income in the years ahead.
But the local real estate market isn’t restricted to Singaporeans alone. Buyers from China, Indonesia, Malaysia, the USA, and India, and a host of other countries, regularly make property purchases in Singapore. Buying real estate in the country offers foreigners a chance to invest in a safe and stable environment where property rights are strictly enforced.
Of course, every buyer also expects that in the long term, prices in the real estate market will rise. The prospect of making money through capital appreciation is one of the prime motives for investing in the property market.
If you think that your real estate purchase has the potential to increase in value, your expectation is entirely justified.
In the last 14 years from 2004 to 2018, residential property prices have risen over 80%.
So, does that mean that an investment in real estate is a sure thing?
Of course, it doesn’t. Like any other investment, real estate carries its share of risks. You may not be able to find a tenant for your property. This could mean losing thousands of dollars in rental income every month. When you want to sell, you may not be able to find a buyer at your asking price.
The success of a real estate purchase is influenced by a number of factors, many of which are hard to predict. In addition to this, there are several misconceptions surrounding property investments. While it’s impossible to look into the future and see how the property market will fare, you should make an effort to educate yourself about the misconceptions. Here are five that deserve your attention.
Myth #1: Property prices will always go up
Historically, real estate prices in Singapore have always followed an upward trend. But this statement is true only if you consider a period that is long enough.
Over a shorter timeframe, a real estate investment could give you negative returns.
Private residential property price index
The graph reproduced above is a stark reminder of the fact that the real estate market doesn’t go up in a straight line.
From 2009 to 2013, there was a continuous upward movement in home prices. Subsequently, there were 15 straight quarters of declines. Prices began to rise again only from mid-2017 onwards.
If you invest in the property market, you have to be ready to wait a long time to make returns. How long will you have to hold on to your investment? Nobody knows the answer to that.
Myth #2. Freehold is always better than leasehold
Most buyers prefer freehold property to leasehold. After all, “freehold” means it’s yours forever, while “leasehold” signifies a limited tenure.
But, is that correct? There are many circumstances when you may have to give up your rights on freehold property. For example, the government may require the land for development. Or, there may be an en-bloc redevelopment where the majority of residents could opt to sell.
So, “freehold” may not mean that the property is permanently yours.
Myth #3: An increase in property prices means that you can sell and make a profit
If you have bought real estate as an investment and planned to sell it when prices rise, it’s a good idea to carry out a detailed calculation of the profits that will be available to you.
It isn’t merely a matter of subtracting your purchase price from the current market value to arrive at your profit. There are several costs involved.
You may have to pay seller’s stamp duty (SSD). This is payable on all residential properties that are bought on or after 20 February 2010 and sold within a specific period. SSD rates range from zero to 12%, and they can put a big dent into the surplus that you generate by selling when the market climbs.
There may be other costs as well. You could have to pay a property agent a commission of 1% to 2%. Additionally, you may have to contend with legal fees, and if you had purchased the property with a loan, a pre-payment penalty to your lender as well.
Myth #4: It’s better to handle your property transaction directly
According to one school of thought, the money that you spend on a property agent is a waste. It’s possible to control every aspect of the transaction yourself if you put in enough time and effort into the exercise. Why should you waste thousands of dollars on an estate agent?
After all, a 1% or 2% commission on a million dollar home is S$10,000 or S$20,000. That isn’t a small sum.
Theoretically, this argument is correct. However, in practice, you will probably be far better off if you engage an agent and spend the extra money.
Why is that? What value does the estate agent bring to the deal?
Here’s what a good property agent does:
- Helps you identify buyers/sellers for a property.
- Guides you through the steps involved in the transaction.
- Negotiates the best rates for you.
- Assists with paperwork and legal issues.
For most buyers and sellers, the amount that is paid to the estate agent is far less than the extra value that they receive. Don’t make the mistake of handling the transaction yourself unless you are confident that you have the required knowledge and expertise.
Myth #5: You can save money by avoiding a home inspection
If you are buying property, should you arrange for a home inspection first? Or does it make more sense to save a few hundred dollars by skipping this step?
Remember that you must get a home inspection done. Your property agent will help you to arrange this. The reason that it is essential is that all flaws are not visible to the untrained eye. The home inspector will help you to spot these before it is too late.
If there is a problem that emerges during the inspection process, you may not want to go through with the deal at all. At the very least, you may get an opportunity to renegotiate the price.
The bottom line
If you are planning to enter into a real estate transaction, it’s advisable to carry out detailed research before you commit yourself. Take the advice of a property agent that you can rely upon.
You must not forget that the investment decision that you make today will have an influence on the returns that you make many years, or possibly even decades, later.