Tuesday, April 10, 2012

Are you buying for own stay or investment?

How many times have we heard this question being touted by real estate agents when we go for property viewing, the most important pastime for Singaporeans today.

From a layperson perspective, things cannot be more common-sensical. If you like the place, and if it is within your means, then buy that dream condo. Achieve the 5C. Property prices ALWAYS go up in Singapore. Even if it falls by a little in the next 1-2 yrs, it’s ok one, they will go up in the end.

Now, as a value investor, I have always found this logic very strange.

If it is your home and not an investment then it’s ok to pay a higher price? Why is that so?

The most important issue

You see, sellers are the worst consultants. They are always trying to divert your attention away from the most important issue at hand. Be it buying a bag, a car, or a house, what’s important is always the feeling, the image, the dream. It is never about the price.

But the problem for investors, it is only about the price.

It can be the most crappy Mickey Mouse shoebox, but if the price is low enough (ie the rental yield can go to 15%), then it’s still a buy. Of course, a family of four might not want to stay there for practical reasons.

So I guess that is why the question is asked. The assumption is: if it is for staying, hence not an investment, price becomes a non-issue.

But then, should you treat your home as an investment or as an aspirational item like a LV bag, or a luxury watch?

If the answer to the above question is investment, then things are very clear. We should apply value investing concepts that we know so well already. Buy when price is less than intrinsic value, buy when there is a margin of safety. None of these criteria are in place for Sg properties now, which is why agents will never want to get into this argument.

But buying a house, is not just about investing, there is the aspiration, hope and dream element. Here is where most people get confused.

Let’s try to debunk this argument that a house is like a LV bag or a Rolex. It’s a lifelong aspiration and hence you cannot put a price tag to it. You buy it because you have attained a certain stature in life and you can afford it.

Severe damage to purchasing power

First we must recognize that buying a house is in a vastly different quantum vs an LV bag, or a luxury watch, or even a dream car. Alas in Singapore, crazy but true, the quantum can be quite close: a Ferrari can cost more than a Mickey Mouse shoebox.

Nevertheless, for most people, if we overpay for our dream home, it severely damages our purchasing power. We are talking about being set back by a few hundred thousands, it will take years, or even decades to earn that back through normal income streams. For some buyers who bought way too high, I can even see half a million losses.

What this means is that you have to forgo a lot of LV bags and Rolexes, maybe that BMW 5 series/Audi A4 is also being pushed back by a decade. The kids might need to cut back a few enrichment classes. Maybe Machu Pichu or Eygpt, which might be a more fulfilling life goal than living in a hyped-up development, gets back to places I want to visit “someday”. Not this year. Btw “someday” is also known as the code word for “never”.

This is not the best idea for a quality lifestyle in a condo.


We live in a world of priorities. Overpaying for the dream condo also means we prioritized buying this property so much that we are giving up on all other priorities in life. Looking at the concrete examples given above, we can now ask ourselves vividly, is this condo worth more than all the other pleasures added together? Lifetime worth of LV bags and watches and other tiny luxuries, the dream car, the dream tour, the kids’ educations and the many other dreams in life?

If the answer is no, then it means that we should always factor in pricing, even for a lifelong dream.

Ok some might argue, it is more than a dream, it is an asset that can be passed down from generations to generations. You never really owned a Patek Philippe, you merely look after it for the next generation. Hence the popularity of freehold vis-à-vis leasehold.

Is it really Freehold?

That powerful catch phrase from Patek sums it all up. So how can we put a price tag on a family heirloom. That is priceless. Obviously a lot of people buy this argument, hence they can pay a HDB for a Patek and they pay the equivalent of 3 to 5 condo units in Tokyo for a Sentosa Cove. If it is for the next generation, it’s what you can afford, not what it’s really worth.

This line of logic will make all the agents really happy. You are willing to pay anything for a freehold property bcos you believe it is for your next generation and generations to come.

Sadly, we all know that is never true. Ask the owners of beach front properties at East Coast who had their land taken away when the Govt needed to develop the ECP highway and the East Coast Park. Even for 99 yr leases, the old Gillman Heights saga drives the point home. Condition changes. Nothing is ever really yours, or in your family.

Price is what you pay, but value is what you get

We pay a price for something we want to give to the next generation, but value is actually what we want to imparted to them. The play of words here is meaningful. Value can mean the intrinsic value of the item in question or values: as in moral values, the really important stuff. If you pay a lot to impart something that has little worth/value, what is the point then?

Even a Patek, is it really a 100k watch that is being passed down? Or the memories of good times between father and son, the teachings and values, the joy and sorrow shared, the games played and all the wonderful times?

In fact, the most important values that we can impart: integrity, tenacity, humility, are free.

Anyways, let’s get back to the question: can we really ignore price if we want to buy a property for our own stay?

This confuses people because property, as the controversial asset class here, can be an investment and/or an aspiration.

When it is an investment, there are principles that we can use the value it. We know that rental will generate cashflows and with cashflows we can derive values. We might be staying in it and not renting out, but bcos there is a rental market, we can always know how much rental the property can fetch, and with that info, we can calculate the value. That is why evaluators have valuations for all properties in Singapore.

Agents want us to think of property as an aspiration bcos it will delink price from value. Price becomes what we can afford, and what we will pay to realize our dreams. Nothing to do with value. But as we have argued, if we follow this line of logic, we are giving up other things. And sometimes it is also not what we really want to pass on to our children.

Ultimately price must follow value just as the sun must rise from the east. It may deviate for a long time, or it may go so crazily high that it seems like it will never ever come down again. But in the end, life goes in a cycle and definitions oscillates with circumstances. Prices go up, prices go down, property becomes an aspiration, or a bad investment and then a huge liability. But when it’s cheap enough, it becomes an opportunity of a lifetime.