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Potential Drawbacks Of The Magical 5 Year Holding Period
A hand has 5 fingers. A starfish has 5 legs. The pentagon is built with 5 sides. Office workers look for the hour hand to hit 5 every weekday. In football, the best central defender usually wears the number 5 behind his shirt. Professional tennis players often have to go 5 sets to win Grand Slam final. You get better work life balance with a 5 day work week and travellers take about 5 hours to fly from Singapore to Delhi.
There are countless things that are associated with the number 5. But when it comes to property owners, buyers, speculators and investors in Singapore, it is a magical number that we know by heart.
Home owners can sidestep seller’s stamp duty (SSD) from the fifth years onwards of owning a property. HDB flat owners who bought direct from HDB have to fulfil a 5 year minimum occupation period (MOP) before they are eligible to sell their flats in the open market. These include DBSS bought directly from developers and resale flats under CPF housing grant scheme. Developers have 5 years to sell off their new launch condominiums. And HDB owners can start buying private properties without penalties after 5 years.
So fixated are we on the 5 year “rule” that it has become the standard that property investors must be willing to commit in order to invest in property. And because prices are steadily rising, most people do not even bat an eyelid when committing themselves to at least 5 years. And if the growing trend is sustained, each and every buyer will be looking at a hefty payday in 5 years. All that is needed to buy a ticket is to have enough cash to at least cover the expenses of owning the property for 5 years.
From an investment standpoint, 5 years is not exactly that long a period. But bear in mind that it only takes weeks of bad news to wipe out years of unrealized accumulated gains. Warren Buffett likes to attribute this volatility to Mr Market. Although he is referring to the stock market, the same thing can be used as a metaphor for the property market. It only took a matter of hours after Lehmann Brother’s announcement for the market response to sink in.
What can happen in 5 years that will hurt your investment?
1) The population white paper gave the property market a shot in the arm after the numbness of the cooling measures started to set in. But remember that the white paper is just a projection for planning. It may or may not happen. Looking at the backlash that came after the white paper was published, the government is likely to do things a step at a time and measure the response.
2) As recent as the very last day of 2012, America was still facing the fiscal cliff. There is still a great uncertainty with what is going on in Europe. China is starting to show signs of economic slowdown. There is a possibility of aggression between countries in East Asia. Iran is about 1 year away from having a nuclear weapon. Another bird flu outbreak is going on in China. A bomb went off during Malaysia elections campaigning. Any of these local events can trigger a crisis on a global scale. Remember what happened right here in Singapore during SARS?
3) Another major corporate meltdown can cause huge stress on the economy. Job cuts can cause a huge outflow of expatriates from Singapore that will seriously dilute rental market demand. Rental yield become unattractive, less people will buy properties for investment pushing prices down. This means that in 5 years when you are finally going to sell your property, you could be looking at a loss. Selling early will incur the wrath of SSD while holding on for much longer will incur the wrath from your banker.
4) Mortgage rates are currently at extraordinarily low levels. This is partly influenced by the promise of low rates from the Federal Reserves in USA. Should mortgage rates shoot up like an arrow, a lot of property owners who have maximum leverage may run into mortgage defaults if they have not kept sufficient cash reserves particularly for setbacks like this. Imagine trying to make ends meet for 5 years with creditors on your back.
5) With so many rounds of intervention from government authorities in the property market, we can clearly see that the Singapore property market is highly regulated and controlled. This means that basing your investment decision based on market data and calculated strategies can be fruitless if new policies are introduced that are detrimental to your strategies. The intervention on car loans is a good example of this occurring. Businesses were taken by surprise as they have ordered stocks without any knowledge or insider news on what was going to happen. The government have now given some leeway to those businesses affected. But it is an example of how government policies can make your plans redundant.
6) In recent months, more and more information have been broadcasted regarding the huge supply of public and private housing in the works. The government is making an effort to calm down the market by assuring everyone that there will be enough housing for every household. Despite all the announcements and cooling measures, new launch condominiums continue to hit record sales attributing strong figures to genuine first time home buyers. There is only so many first time home buyers to eat up new launch condominiums. Once the demand softens, we could be looking at huge discounts in an effort to clear developer’s stock. This can affect your property value as your property is only worth as much as what a buyer is willing to pay.
7) And then there is the issue that no real estate investor wants to talk about. The next General Elections is slated for 2016. That is less than 5 years away. The opposition performed well in 2011. They also did well during by-elections in 2012 and 2013. Who knows what is going to happen in 2016. If a freak result does indeed occur, the impact on property prices remains to be seen.