I'm sure many people will tell you that EC is an excellent investment and that property always go up and never go down. But being the cynical person that I'm lets look at the maths as numbers never lie.
Consider buying an EC for investment to sell once it is privatised. Lets say for instance, you bought a nice swanky 3 bedroom unit in Yishun for $800,000 which is the price range for most EC, let's not talk about $ psf because the numbers are generally misleading.
misleading how?
simple, you cannot sell half of your unit right?
Back to topic, for $800k, most people will hold out for about 5-10 years before. I've seen some people say 5-10 years, it gets confusing but it does not matter. Let us say 5 year (to make it more advantageous to those who say it is profitable.)
On year 5, you sell the unit for $1,000,000. Ka-ching! It is a profit of $200,000 or 25%. But is it real profit?
But hold your
horses houses, let's put some things into perspective for you. For $800k to be a million in 5 years, the compound interest % is about 4.5% Meaning to say, every year, the value of the $800k unit goes up by 4.5%
It is something like this:
Bought: $800k
Year 1: $836k
Year 2: $874k
Year 3: $913k
Year 4: $954k
Year 5: $997k (or close to a million)
Lets put in the amount of money you have to fork out before you talk about selling it or realising it for profit.
When you buy a EC, you can only take bank loan, being the friendly neighbourhood banks, they will offer you a 3 year fix rate loan for 30 years or rather, but lets put the interest rates at 2% fixed for 30 years which is an extremely attractive and un-do-able interest rate, to skew things in favour of buying an EC, lets keep the interest rates low.
This is the loan repayment for a $800k flat at 2%, by year 5, you will have paid $5300+ for interest only which is very low.
so far, the costs for 5 years of EC ownership is: $805300
what about properties agent's commission? 1% commission for selling at $1 mil is $10,000.
Now, your cost is about $815300k.
We can go further to add renovation costs, maintenance costs, utilities and many more to up the costs for owning an EC for 5 years before selling. If the interest rates is 2.5% fixed 3 years and increased to 3% for year 4 and year 5, you have to pay about $1500 more just for interest alone.
If we were to factor in a low inflation of about 2-3% annually, the unit is actually losing money rather than earning when you sell it for a million.
It doesn't matter if you do not see it the way I see things, but given a very positive scenario, we are barely making a profit from buying an EC, so I hope more buyers will just take into account of these following factors that property agents do not mention when trying to market you an EC unit.
So far I have never seen any property agent able to confirm true profits of EC using maths. Then again, I have not met much property agents.
Yet on the other hand, at it's high point, BTOs bought in Punggol were selling for 3 times its purchased price, even if held for 10 years, it is more than 10% annually. If it sold for twice it's purchased price, holding for 10 years, the rate of return is more than 7% not to mention HDB loans are at 2.6%. If that is not good debt, I don't know what is.
In closing
As always, it is a good mental exercise to do some maths every now and then when it involves a large sum of money.
Especially your own money!
Things aren't what they always seemed to be, do not take people's word for it.
